Trump Declares Iran Deal Dead as Middle East Tensions Escalate

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Summary:

Trump declares the Iran agreement void, triggering renewed Middle East tensions and a sell-off in risk assets; Fed minutes reveal growing concerns over persistent inflation...

Highlights

1. Middle East tensions flare as Trump declares Iran deal "void," fueling an oil rally and a sell-off in risk assets.

2. Fed minutes show growing concerns over persistent inflation.

3. Timiraos: Internal Fed divisions mainly reflect differing views on the economic outlook.

4. Trump: The U.S. may reimpose a naval blockade on Iran.

5. Traders increasingly expect both the ECB and the BoE to deliver two rate hikes this year.

6. U.S. crude oil inventories unexpectedly rose by 2.998 million barrels last week.

Details

Middle East Tensions Flare as Trump Declares Iran Deal "Void," Fueling an Oil Rally and a Sell-Off in Risk Assets

During the NATO summit, President Trump declared that the temporary agreement signed last month to end the conflict with Iran was no longer valid and hinted at further U.S. military action against Iran. The statement triggered an immediate chain reaction: Iran claimed it had launched attacks on U.S. military facilities in Bahrain and Kuwait, while U.S. Central Command announced a new round of airstrikes on Iranian targets, with the primary objective of ensuring freedom of navigation through the Strait of Hormuz.

As the Strait of Hormuz carries roughly one-fifth of the world's oil supply, its security is critical to global energy markets. Earlier Iranian attacks on oil tankers in the strait sparked a sharp surge in crude oil futures. Brent crude rose more than 5% at one point, while WTI crude reached its highest level in more than two weeks. The rapid rise in energy prices not only intensified global inflation concerns but also triggered broad declines in equities and other risk assets.

Fed Minutes: Concerns Over Persistent Inflation Are Growing

Minutes from the Federal Reserve's June meeting showed that policymakers have become increasingly concerned about persistently high inflation. Several participants noted that price pressures have broadened across sectors, ranging from transportation and airfares to petrochemical products and agricultural inputs. Services inflation, particularly excluding housing, remains elevated. A few members even argued that there was a case for raising interest rates at the June meeting, although the Committee ultimately left rates unchanged.

The minutes also removed much of the previous forward guidance and were noticeably shorter, reflecting Fed Chair Kevin Warsh's preference for maintaining policy flexibility and avoiding premature commitments.

Markets reacted quickly. The CME FedWatch Tool showed the probability of a September rate hike rising from 62% to around 69%. Meanwhile, U.S. Treasury yields climbed across the curve, with the 10-year yield briefly reaching a seven-week high, reflecting renewed market pricing of inflation risks and the possibility of further monetary tightening.

Timiraos: Internal Fed Differences Stem Mainly from Diverging Economic Outlooks

Nick Timiraos, often referred to as the "Fed whisperer," said the June FOMC minutes suggest that policymakers' differences primarily reflect differing expectations for the economy rather than fundamental disagreements over whether to raise or cut interest rates.

According to Timiraos, two possible scenarios have emerged within the Fed. If inflation remains persistently high, nearly all officials believe higher interest rates—or even further policy tightening—would be necessary. However, if inflation falls back to the 2% target relatively quickly, most officials believe current rates could be maintained and rate cuts could eventually become appropriate. He emphasized that the phrase "returns to 2% relatively quickly" is particularly important because it preserves the Fed's policy flexibility. The key question now is whether inflation will reaccelerate or resume its downward trend.

Timiraos concluded that the Fed's next move will continue to depend on incoming economic data, especially inflation. While markets had previously priced in rate cuts, the latest minutes highlight that the policy outlook remains highly uncertain.

Trump: The U.S. May Reimpose a Naval Blockade on Iran

Speaking at the NATO summit in Türkiye on Wednesday, President Trump said the U.S. military may reimpose a naval blockade on Iran, although any renewed restrictions in the Strait of Hormuz would apply only to Iran, with other countries remaining free to navigate the waterway.

Trump also suggested that the United States could take control of Kharg Island, Iran's largest oil export terminal. He said the U.S. military has no plans to strike Iran's highest-priority targets, such as bridges, but would destroy them if necessary. He added that while the U.S. would prefer not to target Iran's desalination facilities, it may be forced to do so. Trump also questioned whether Iran was negotiating in good faith, saying he was "very unhappy" with Tehran and warning that the U.S. military could launch another major strike on Iran later Wednesday night.

Traders Expect Two More Rate Hikes From Both the ECB and the BoE This Year

As tensions in the Middle East intensify and oil prices surge, traders increasingly expect both the European Central Bank and the Bank of England to raise interest rates twice before the end of the year, with each hike expected to be 25 basis points.

After the collapse of the U.S.-Iran peace agreement, President Trump said at the NATO summit in Türkiye that the U.S. military could launch another major strike against Iran and may reimpose a naval blockade. The comments pushed NYMEX crude oil futures up as much as 8%, with prices briefly reaching $76.08 per barrel.

U.S. Crude Inventories Unexpectedly Rise by 2.998 Million Barrels

The U.S. Energy Information Administration (EIA) reported that crude oil inventories increased by 2.998 million barrels last week, compared with market expectations for a 2.371 million-barrel decline.

During the same period, gasoline inventories fell by 1.904 million barrels, versus expectations for a 1.624 million-barrel decline, while distillate inventories decreased by 4.98 million barrels, compared with forecasts for a 568,000-barrel increase. Daily U.S. crude imports rose by 1.096 million barrels, while refinery utilization rates declined by 0.8 percentage points.

Today's Focus

19:30 (UTC+8) ECB releases the minutes of its June monetary policy meeting

21:00 (UTC+8) New York Fed President John Williams speaks

22:00 (UTC+8) U.S. June Existing Home Sales (Annualized)

01:30 (UTC+8) Dallas Fed President Lorie Logan speaks

03:30 (UTC+8) Bank of England Deputy Governor Ben Broadbent speaks

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