Iran war: Look beyond stocks to understand state of economy, experts say
Yields on 10-year US Treasury bills, a bellwether for inflation, are up nearly 60 basis points since the start of the war on Iran. The
Yields on 10-year US Treasury bills, a bellwether for inflation, are up nearly 60 basis points since the start of the war on Iran. The US-Israel war on Iran is escalating again and oil prices are on the rise, but experts say the real clues to the state of the economy lie beyond indices and those price points. “The markets have been somewhat quiescent in the last month or two, but have changed since the war in Iran began,” said Michael Klein, professor of international economic affairs at Tufts’ Fletcher School. Yields on the 10-year United States Treasury bills, for instance, are up nearly 60 basis points since the start of the war on Iran in late February to 4.6 percent on Monday. That is the highest level the yields, a bellwether for inflation, have reached in the past year, Klein said, making it more expensive for businesses to borrow money and slowing the economy. “Interest rates on bonds will incorporate inflation rate because lenders, when they get paid back, they want to be covered for erosion of their money, which happens through inflation,” Klein said. It also shows that investors are expecting inflation to rise more as the Strait of Hormuz, the strategic chokepoint through which 20 percent of the world’s oil travelled before the war, continues to remain practically closed after a brief respite when cargo flows picked up in the days after the US and Iran signed a memorandum of understanding to extend their ceasefire. That brief opening up was reflected in consumer prices, which were down 0.4 percent in June on a monthly basis.
That was led by a decline in energy prices, including a 9.7 percent drop in oil prices, according to the Department of Labor’s Bureau of Labor Statistics Consumer Price Index (CPI). But a month after the MoU was signed, and days after it seemed to fall apart, the benchmark Brent crude reached $91.42 a barrel on Sunday, before falling on Monday to $88.04. The US national average price at the pump for a gallon (3.78 litres) of petrol was at $4, up from $3.87 a week ago. “Markets are forward-looking. People are discounting what Trump is saying about the war because he says one thing one day and another day another,” Klein told Al Jazeera. Traders now see a 55 percent chance of a quarter-percentage point interest rate hike in the US in September, according to the CME Group’s FedWatch tool. Rachel Ziemba, adjunct senior fellow at the Center for a New American Security, agrees that the past month “has gone from overoptimism of what the oil flows will be” as oil prices sold off even before the MoU was signed and on the back of some increase in volumes, to a “correction in the last week as the MoU was falling apart and risk of conflict was increasing”. In the period before and after the signing of the agreement on June 17, there was more oil than tankers to carry it as trapped vessels exited the Strait of Hormuz, bringing prices lower. “That was not commensurate with longer-term fundamentals,” said Ziemba. But now, with short-term supplies having dwindled, prices are on the rise again.
The BriefWire