Bond yields and oil prices flash warning signs as Iran war strains economy
Experts say Treasury yields, fuel prices and food risks tell a sharper story than stock indexes as the Strait of Hormuz disruption continues.
By Lucas Ferreira · Science & Environment Writer
3 min read
The war involving the United States, Israel and Iran is pushing oil prices higher and raising inflation fears, even as major stock indexes show only limited stress. Economists told Al Jazeera that investors should look beyond equities to Treasury yields, fuel markets and food-supply risks to gauge the economic damage.
Michael Klein, a professor of international economic affairs at Tufts University’s Fletcher School, told Al Jazeera that markets had been relatively calm before shifting after the war in Iran began. He pointed to the 10-year US Treasury yield, which has risen nearly 60 basis points since the start of the war in late February and stood at 4.6 percent on Monday.
Klein said that level was the highest for the yield in the past year. Higher yields raise borrowing costs for companies and can slow economic activity, while also reflecting investor expectations for inflation, he said.
Oil shock feeds inflation concerns
The Strait of Hormuz remains practically closed, according to Al Jazeera, after a brief reopening when cargo flows improved following a June 17 memorandum of understanding between the US and Iran to extend a ceasefire. Before the war, about 20 percent of the world’s oil moved through the strait, Al Jazeera reported.
The short-lived increase in cargo movement helped pull down consumer prices in June, according to US Department of Labor Bureau of Labor Statistics data cited by Al Jazeera. The Consumer Price Index fell 0.4 percent from the previous month, driven by lower energy costs, including a 9.7 percent drop in oil prices.
That relief has faded. Brent crude reached $91.42 a barrel on Sunday before easing to $88.04 on Monday, while the US average price for a gallon of petrol rose to $4 from $3.87 a week earlier, Al Jazeera reported.
Traders now see a 55 percent chance that the US Federal Reserve will raise interest rates by a quarter percentage point in September, according to CME Group’s FedWatch tool cited by Al Jazeera.
Fuel products are under pressure
Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, told Al Jazeera that oil markets had moved from excessive optimism about future flows to a correction as the ceasefire understanding weakened and conflict risks increased.
Ziemba said the period around the June 17 agreement created a temporary supply release as trapped vessels left the Strait of Hormuz. She said that shift lowered prices but did not match longer-term supply conditions.
She also said consumers are more exposed to shortages of refined products such as gasoline and diesel than to crude oil itself. Al Jazeera reported that some major refineries are producing less, including Middle Eastern facilities damaged by Iranian attacks and Russian refineries hit by Ukrainian drones.
Stocks mask wider risks, economists say
Major US equity indexes have moved unevenly. Al Jazeera reported that over the past month the S&P 500 has fallen 0.81 percent, the Nasdaq-100 has dropped 5.66 percent and the Dow Jones Industrial Average has risen 0.53 percent to 51,839, after reaching 53,055 on July 6.
Mariano Torras, chair of the finance and economics department at Adelphi University, told Al Jazeera that equities have been fairly steady despite risks to global food and security. He said markets appear to expect support from the US government and Federal Reserve if shocks intensify.
Ziemba warned that a prolonged closure of the strait could lift prices for energy-intensive commodities such as fertilisers. She told Al Jazeera that developing countries in Africa and South America could be hit hard as the Southern Hemisphere enters sowing season, while India could also face added food inflation because of its fertiliser use.
Klein told Al Jazeera that short-term market moves can be misleading because prices reflect investor sentiment as much as economic fundamentals. The sharper warning signs, the economists said, are showing up in borrowing costs, fuel supplies and the potential cost of food.
This story draws on original reporting from Al Jazeera.