Iran confirmed on Tuesday that the Strait of Hormuz will stay shut until its demands are met, a move that lifted Brent crude above $88 a barrel and nudged US equity markets lower.
Market reaction
The S&P 500 slipped 0.3% by mid-afternoon in New York, erasing earlier gains, while the technology-heavy Nasdaq 100 fell 0.4%. Energy, utilities and industrial shares managed modest gains, but large-cap technology stocks were the main drag on the broader index.
"Lack of progress on a peace deal in Iran and rising oil prices put some modest pressure on stocks," said Mark Hackett, chief strategist at Nationwide Funds Group.
Despite the dip, analysts noted that investors are weighing the news against last week's rally, suggesting the impact may be limited in the short term.
Implications for inflation and Fed policy
Higher oil prices have revived expectations of a Federal Reserve rate hike in September. Bloomberg data shows markets now price a roughly 50% chance of a hike, up from earlier estimates.
Analysts remain divided on the inflation outlook. Douglas Beath, global equity strategist at Wells Fargo Investment Institute, warned that "elevated refined energy product prices and some increasing stickiness in core services, especially rents and medical care, make a less sanguine near-term inflation outlook."
Citigroup analyst Andrew Hollenhorst expects the upcoming Consumer Price Index (CPI) report to show cooling outside of energy, shifting focus back to domestic economic drivers. The Bureau of Labor Statistics is scheduled to release the data on Wednesday; the CPI can be accessed at https://www.bls.gov/cpi/.
Bloomberg Economics' median forecast projects a 0.1% rise in the headline CPI for July, following a 0.4% decline the month before, with core CPI potentially falling to its lowest year-over-year level since March 2021. Energy prices are expected to subtract 11 basis points from the headline figure.
Capital.com senior market analyst Daniela Hathorn noted that "investors are increasingly pricing a scenario in which inflation continues to ease, the Fed remains patient and earnings growth justifies elevated valuations." She added that a hotter-than-expected CPI reading could push Treasury yields and the US dollar higher, forcing a reassessment of recent optimism.
Upcoming data and earnings
Beyond the CPI, earnings from technology firms CoreWeave Inc. and Super Micro Computer are due after market close on Tuesday. Both companies have seen volatile share movements since their IPOs, and their guidance will be closely watched for clues about capital-expenditure trends.
Analysts at Bespoke Investment Group note that technology stocks are raising guidance at a faster pace than any other sector this earnings season, underscoring the importance of the upcoming results.
Meanwhile, the National Federation of Independent Business reported that US small-business optimism rose to its highest level in a year, and job-creation plans reached a peak not seen since October 2022. However, existing-home sales fell to a three-month low, reflecting pressure from high mortgage rates and prices.
With the Middle-East tension and the prospect of higher US rates remaining wildcards, market participants will be watching the CPI release, corporate earnings and any further statements from Tehran for clues on the direction of both energy markets and broader equity performance.