US reinstates blockade on Iran shipping and impose a 20% levy on cargo shipped through the Strait. Waller signals possible rate hike. Oil prices surge. Global central bank tightening back in play and bond yields increase

The escalation of tensions between the US and Iran late last week, over the weekend, and during the NZ trading session set the tone for markets at the start of the new week. From the US perspective, the objective of the latest military action was to degrade Iran’s ability to attack ships transiting the Strait of Hormuz. From Iran’s perspective, the aim was to show it still had leverage in negotiations and wanted to maintain control of the Strait.

In overnight developments, President Trump posted on social media that the US would reinstate a blockade preventing Iranian ships, or those of its customers, from entering or leaving the Strait of Hormuz. He said the US would become the “GUARDIAN OF THE HORMUZ STRAIT” and, as a matter of fairness, charge 20% on all cargo shipped through the Strait to cover the cost of safety and security.

With Trump, one never quite knows how seriously to take such pronouncements, but Gulf allies would not be pleased with this plan, and it almost certainly violates international law. The 20% levy would add about USD16 to the cost of every barrel of oil passing through the Strait on a typical supertanker. It remains to be seen whether the plan will stick — probably not — and whether it is merely a negotiating tactic aimed at getting Iran to pause its military strikes on shipping in the area.

The FT reported that the UAE plans to build a new port and container terminal on its east coast at Fujairah, allowing exports to bypass the Strait of Hormuz. The new port would take about 18 months to build.

Oil prices have extended the gains seen during Asian trading, with Trump’s plan adding to upside pressure. Brent crude is trading around USD83 per barrel, up 9% from last week’s close. European gas futures are up over 7%. As we go to print, there are headlines that Houthis say they attacked an airport in Saudi Arabia with ballistic missiles.

Higher oil prices pushed global rates higher, with a hawkish speech by Fed Governor Waller adding to the pressure. Waller said that if there is another hot reading on core inflation this week, the Fed will need to consider tightening monetary policy in the near term. He added that he was concerned about the elevated pace of core inflation this year, noting the steady rise in the core PCE deflator. If core inflation were to show several months of lower readings — still a reasonable outcome — he would support keeping policy steady.

US Treasury yields are up 4–6bps across the curve from Friday’s close, with the 2-year rate at 4.26%, the 10-year rate at 4.61%, and the 30-year rate at 5.10%. Short-end rates are now trading at a fresh cycle high, while longer-end rates remain about 7–10bps below their May highs. The Fed Funds market is back to pricing a full hike by the September meeting and two full hikes by March. European and UK rates are also higher, led by the short end, as higher oil prices bring ECB and BoE rate hikes back into play.

In equity markets, investors have also had to contend with a significant sell-off in semiconductor stocks, amid questions over whether the AI boom has become overextended. South Korea’s SK Hynix plunged a record 15%, sending the Kospi index down 9% and triggering a market suspension. This dynamic has spilled over into the US market, with the S&P500 down 0.7% in late-afternoon trading, led lower by the IT sector. The Nasdaq is down 1½%. The Euro Stoxx 600 closed flat.

Compared with other markets, currency moves have been modest. The yen has been on the weaker side of the ledger, reflecting the higher-rates backdrop, but also following a Reuters report that Japan has no plans to overhaul the Government Pension Investment Fund’s asset allocation — something FM Katayama had encouraged on Friday, which had supported the yen. USD/JPY is up 0.5% from last week’s close to 162.40, while NZD/JPY has pushed up to 93.5.

The NZD is little changed from where we left it yesterday, at around 0.5755, and is only slightly below last week’s close after trading up toward 0.5790 overnight. The AUD has been at the weaker end of the ledger, trading down to 0.6920 and supporting a move in NZD/AUD above 0.83. Overall, NZD cross movements have been modest, with the NZD relatively flat against both EUR and GBP.

In the domestic rates market, the combination of global forces and ongoing payside pressure at the short end of the curve, following last week’s RBNZ hike and strong PMI data, drove rates higher, led by the short end. NZ’s Performance of Services Index rose 2.6pts in June to 50.6, among the strongest readings seen over the past three years, albeit still below the long-run average of 52.7. The survey was not as strong as last week’s stellar PMI, but it is consistent with the theme that NZ’s economic recovery is getting back on track.

The 2-year swap rate rose 8bps to 3.61%, the 5-year rate rose 7bps to 3.93%, and the 10-year rate rose 5bps to 4.27%. As expected, NZDM launched the syndication of a new nominal 2038 bond, expecting to issue between $5–7 billion, with initial price guidance of 6–10bps over the 2037 bond. An update last night showed a firm orderbook of around $23b and narrower price guidance of 6–8bps.

In the day ahead, the economic and event calendar is action-packed. NZ’s QSBO will be released, providing further information on the state of NZ’s recovery and price pressures. The RBNZ Chief Economist is also giving a speech on inflation. China trade data and Australian consumer and business surveys are due. US CPI data tonight are expected to show lower gasoline prices driving headline inflation lower. Core inflation is expected to be steady at 0.2% m/m and 2.9% y/y, although the distribution of economists’ forecasts suggests the risks are tilted toward a higher increase. Fed Chair Warsh also gives testimony to lawmakers.

Jason Wong is the senior currency Strategist at BNZ Markets.