by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an important new development in the Iran war, where reports say the US has been quietly running convoys of oil tankers through the Strait of Hormuz. We next review several other international and US developments that could affect the financial markets today, including some encouraging economic news from the United Kingdom and a discussion of US monetary and fiscal policy as gross federal debt tops $40 trillion.

United States-Israel-Iran: Reports yesterday afternoon said the US military has been quietly running convoys of private oil tankers into and out of the Strait of Hormuz for the last several weeks, using a corridor along the coast of Oman and providing escort fighter jets to shoot down any Iranian missiles or drones that might threaten them. The program, run by the 82^nd Airborne Division out of Fort Bragg, North Carolina, is reportedly getting some 10 million barrels of crude out to world markets each day, or about half the daily volume before the war.

• The news helps explain the administration’s anger at Iranian statements that it has total control over shipping in the waterway. In any case, news of the program did appear to push global oil prices slightly lower yesterday, with near Brent crude futures retreating to below $91 per barrel. However, prices later rebounded, possibly reflecting concern that Iran will respond to the revelation by staging new attacks to shut it down.
• Separately, President Trump yesterday announced a new program of economic warfare against Iran, calling it the “most crushing economic operation ever taken against any country” and demanding that US allies abide by it and stop all trading with Iran. Given Iran’s long history of dealing with US economic sanctions, it’s not clear that the new program will be successful. Moreover, it could become a source of further friction between the US and its allies.

United Kingdom: Second-quarter productivity — defined as the average value of output per hour worked — was up 1.8% from the same period one year earlier, accelerating from the 1.2% gain in the year to the first quarter and marking one of the best gains in years. Since productivity growth is key to boosting overall economic growth and living standards, the data is being taken as a sign of improving long-term prospects for the UK economy. Economists believe much of the increase has come from recent investment in artificial intelligence and other technology.

Taiwan: President Lai Ching-te’s government has proposed hiking its military budget by 18% in 2027, bringing the total to the equivalent of $34.5 billion. That would mark Taiwan’s largest defense budget ever and lift its defense burden to above 3% of gross domestic product. The proposal is likely to be resisted by the China-friendly opposition parties, but it nonetheless shows how rising geopolitical tensions continue to push up military spending around the globe, creating new opportunities for investors.

US Monetary Policy: The minutes of the Fed’s July policy meeting, released yesterday, showed that more officials favored raising interest rates last month than the three who formally dissented. Others signaled they would back an increase if consumer price inflation doesn’t cool. The news could rekindle investor concerns that the central bank under new Chair Warsh is too reluctant to hike rates. The prospect of the Fed acting too late to control inflation will likely put new upward pressure on longer-term bond yields, despite the Treasury’s move yesterday (see below).

US Fiscal Policy: Treasury Secretary Bessent announced yesterday morning that his department will double its planned repurchases of government bonds from $2 billion to $4 billion. Although modest compared with the enormous size of the US Treasury market, investors clearly got the message that Bessent would intervene in the market to hold down yields. The move implies the Treasury will issue more short-term debt to fund purchases of longer-maturity obligations, with the likely result of relatively higher short-term yields but lower long-term yields.

• Along with Bessent’s recent move to shield the US Treasurys from Japanese selling as it tried to boost the yen, yesterday’s action underscores how the US administration seems especially focused on capping longer-term yields at around 5%. That’s consistent with our long-held view that there is a significant risk that the federal government will embark on “financial repression,” i.e., artificially holding down interest rates, as debt loads climb.
• The result yesterday was a sharp increase in bond buying, which drove yields lower. The yield on the 30-year Treasury bond fell to 5.195%, while the yield on the 10-year Treasury declined to 4.650%. The drop in yields supported stocks generally, although the prospect of a flatter yield curve weighed on bank stocks.

US Retail Industry: Now that court decisions have forced the federal government to rebate billions of dollars of invalid tariffs, Walmart today said it will use most of its allotment of up to $3 billion to freeze prices to the end of the year. Because of Walmart’s large size and dominance of the retail and grocery industry, the move could potentially have a noticeable impact in holding down overall consumer price inflation in the coming months. Of course, it could also further strengthen Walmart’s competitive position in the industry.

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