Middle East conflict spreads to Red Sea, keeping oil above $100; surging U.S. diesel prices put farming, logistics and heating costs on alert
On Sept. 11 local time, New York's three main indexes — the Dow Jones Industrial Average (0.98%), the Standard & Poor's 500 (0.86%) and the Nasdaq Composite (0.96%) — barely managed a rebound after five sessions. Driving the day's gains was a decline in crude prices. Brent for November delivery on London's ICE Futures Exchange and West Texas Intermediate for October on the New York Mercantile Exchange fell for the first time in six and nine sessions, respectively, easing the burden on equities.
Oil turned lower on news that Gulf states will discuss a solution for passage through the Strait of Hormuz directly with Iran. According to the Financial Times, the foreign ministers of the six Gulf Cooperation Council states and Iran will meet in Salalah on Sept. 14, brokered by Oman. It will be the first time senior officials from the six GCC nations and Iran have gathered in one place since the Iran war broke out on Feb. 28. The move is seen as Gulf states seeking an exit themselves after U.S.-Iran talks stalled.
Even with the pullback, market participants were not fully reassured. Because the Middle East front has widened from the Strait of Hormuz to the Red Sea, Brent and WTI remained above $100 a barrel despite drops of 2.81% and 2.37%, respectively.
The Associated Press and others reported that Yemen's pro-Iran Houthi rebels seized Perim Island (Mayun Island), a key point in the Bab el-Mandeb Strait, just a day after capturing Mocha, a major port on the Red Sea coast. Saudi-backed Yemeni government forces withdrew from Perim Island on Sept. 10. According to the reports, Houthi fighters are being deployed along the Bab el-Mandeb coastline. Perim Island is a strategic choke point that divides the waterway in the middle of the Bab el-Mandeb Strait.
Saudi Arabia, the world's largest oil producer, has relied on the Red Sea route for crude exports since the Iran war closed the Strait of Hormuz. According to the International Energy Agency, Saudi crude supply in August averaged 6 million barrels a day, down 2.3 million from July and the lowest in more than three decades. U.S. online outlet Axios reported that Saudi Crown Prince Mohammed bin Salman Al Saud called Trump twice on Sept. 10 to request airstrikes on the Houthis but was refused. Iranian Foreign Ministry spokesman Esmail Baghaei also said on Sept. 11, referring to the six-nation GCC meeting, "As long as aggressive actions such as the U.S. naval blockade and economic war and illegal interference continue, the safety of shipping in the Strait of Hormuz cannot be guaranteed."
With crude prices soaring, U.S. diesel prices topped $6 a gallon (about 3.79 liters) for the first time ever. Fuel price tracker GasBuddy said on Sept. 10 that the national average diesel price had exceeded $6 a gallon for the first time. The American Automobile Association confirmed on Sept. 11 that the average retail price of diesel stood at $6.06 a gallon. That is 63.3% higher than the $3.71 a gallon of the same period last year.
Consumer sentiment hits bottom, Treasury yields spike — yet tariff war and election-driven 'Trump dividend' keep coming
It is the first time the average nominal price of diesel at U.S. filling stations has topped $6 a gallon. Diesel powers the farm machinery that grows and harvests crops and the fishing boats that bring in seafood. It is also a main energy source for heating, power generation, heavy construction equipment, buses and trains. Above all, as the fuel of trucks — the backbone of the U.S. logistics system — it is seen as a detonator for nationwide inflation. According to the AP, the Independent Grocers Alliance, which comprises 7,500 supermarkets worldwide, estimates that fuel costs account for 15% to 30% of grocery prices. Amazon, the largest U.S. e-commerce company, began imposing a 3.5% fuel surcharge on some sellers after the war began, and FedEx, UPS and the U.S. Postal Service are also levying extra fees on some parcels. Bloomberg predicted that "diesel prices could become a major issue in Maine, which has the highest share of households using home heating oil, and in farm states such as Ohio, Kansas and Iowa ahead of harvest season." Maine, Ohio and Iowa are among the battlegrounds in the Nov. 3 midterm elections for the U.S. Senate.
Beyond diesel, the average retail price of gasoline, which tracks crude, has risen to $4.29. The U.S. average gasoline price was just $2.98 shortly before the Iran war. Kevin Hassett, director of the White House National Economic Council, said on Fox Business on Sept. 11 that "diesel prices are a significant concern."
With oil prices unsteady, consumer prices are stirring too. According to the Labor Department's Bureau of Labor Statistics on Sept. 11, the August consumer price index rose 0.4% from July on a seasonally adjusted basis and 3.4% from a year earlier. That matched market forecasts but far exceeded the Fed's 2.0% target, hardly a low reading. Core CPI, which excludes volatile food and energy, rose 0.3% from July, above the 0.2% consensus. Moreover, the producer price index released on Sept. 10 rose 0.4% from July and 5.4% from August last year, a steeper climb than the CPI. Given that the PPI is a wholesale gauge regarded as a leading indicator for the CPI, and that crude prices have risen quickly of late, consumer price gains could be larger in September than in August.
Weighed down by fuel costs, the University of Michigan's preliminary September consumer sentiment index came in at 47.8, sharply below August's 51.7. It also undershot the 51.4 forecast compiled by Dow Jones. If the reading is confirmed, it would be the second-lowest on record after 44.8 in May. In detail, U.S. consumers' one-year and five-year inflation expectations rose to 4.6% and 3.4% in September from 4.0% and 3.3% in August. Joanne Hsu, director of the survey at the University of Michigan, said, "Consumers expect household burdens to grow further because of rising oil prices and escalating trade tensions."
As inflation fears spread, U.S. Treasury yields soared. On Sept. 11, the 10-year yield — the global bond market benchmark — rose 0.027 percentage point to 4.971%, a step closer to the dreaded 5% threshold. The two-year yield, sensitive to monetary policy, closed 0.080 percentage point higher at 4.630%. The 30-year, the reference for U.S. mortgages, ended 0.003 percentage point lower at 5.358%, still far above the 5% level the market views as a psychological resistance line. The strain persisted even after the Treasury Department raised its buyback program to $6 billion from $2 billion starting Sept. 10, because the growth in total federal debt — which topped $40 trillion for the first time last month — and rising oil prices remain unchanged. On Sept. 9, the Mortgage Bankers Association said the 30-year mortgage rate stood at 6.85% for the period from Aug. 29 to Sept. 4, the highest since June last year. As recently as Feb. 27, just before the Iran war began, the U.S. mortgage rate was only 5.98%.
September rate-hike odds now 86.5% — a hold could shock the market
With market rates moving first, expectations for this month's Fed decision, previously a coin flip between a hike and a hold, have swung rapidly toward tightening. According to CME's FedWatch, the fed funds futures market raised the probability of a 0.25 percentage point hike at the Sept. 15-16 FOMC meeting to 86.5% from 72.4% a day earlier. The odds of a hold fell sharply to 13.5% from 27.6%. A month ago, on Aug. 11, the probability of a hike was 48.4%, below the 51.6% odds of a hold.
Trump's universal dividend pledge poured fuel on Wall Street's shift toward forecasting a hike this month. Speaking on Sept. 9 at the Republican national convention in Dallas, Texas, Trump declared, "If Republicans win both the House and the Senate, we will pay a $5,000 dividend to every adult in America." On Sept. 11, he wrote on his social media platform Truth Social, "When I say something, I mean it," urging voters to "vote Republican because the $5,000 dividend is what Americans deserve." Such cash-handout largesse only heightens the need to head off inflation in advance.
Some say Trump's dividend plan is being pushed without any funding plan. Distributing $5,000 to 240 million American adults would require at least $1.2 trillion — comparable to a full year of federal interest payments or annual defense spending. Commerce Secretary Howard Lutnick told NBC that if 100,000 wealthy foreigners who want to come to the U.S. each paid $5 million, that would raise $500 billion, citing the so-called "platinum card." Under the program, paying $5 million allows a foreigner to stay in the U.S. up to 270 days a year without paying taxes on income earned abroad. Lutnick also said the Intel shares the government acquired last August have risen fivefold in price, adding, "We've made a $50 billion profit."
Trump and Vice President JD Vance cited tariff revenue as a funding source on Fox News a day earlier. U.S. tariff revenue currently runs only around $200 billion a year. Even much of that is being refunded to companies following the Supreme Court's February ruling that the reciprocal tariffs were unlawful. Hassett, the NEC director, raised the possibility of going through the congressional budget reconciliation process on Bloomberg TV on Sept. 11. That, too, conflicted with Trump's claim that "congressional approval is not needed" and Lutnick's assertion that the money "won't come from taxpayers." The Wall Street Journal called the plan "a preposterous sum" and "blatant vote-buying" in a Sept. 10 editorial.
The Trump administration's continued trade war with Canada and others — even after it imposed alternative tariffs of 10% to 12.5% worldwide on July 24 under Section 301 of the Trade Act — is another source of inflation risk. The administration is pressing Samsung Electronics and SK hynix daily, threatening tariffs on semiconductors unless companies invest in the U.S.
Whether the Fed will raise rates this month as the market expects is not yet certain. Doves within the Fed, including New York Fed President John Williams and Governor Christopher Waller, who see "clear signs of cooling inflation," are not few. What is clear is that a further hold could trigger far greater market disappointment than before. Even after the July 29 FOMC meeting, when a hold was largely expected, New York stocks tumbled 1.5% to 2.2% on disappointment that the Fed was ignoring inflation. As bond market "vigilantes" dumped debt, the 30-year Treasury yield spiked to its highest since the 2007 global financial crisis. Moreover, Warsh himself declared at the Fed's economic policy symposium in Jackson Hole, Wyoming, on Aug. 28 that "if underlying inflation is not moving toward the Fed's inflation target at a sufficient pace, we will do what we have to do." He delivered a decidedly hawkish message that raised market expectations for tightening further.
Internationally, after South Korea's Monetary Policy Board raised rates for a second consecutive month in July and August, the European Central Bank lifted its three key policy rates by 0.25 percentage point each on Sept. 10. Markets expect the Bank of Japan to raise its policy rate once more from the current "around 1.0%" at its Sept. 17-18 policy meeting. While Trump, with the election as his priority, neutralizes the prospect of rate cuts, whether the Fed falls in line with the market's natural course has become the biggest near-term variable for investors.
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