Trade War Escalation Pushes Oil Prices to 7-Year High Amid FOMC Jitters
The global economy is facing two major conflicts that are weighing on growth and inflation. The first is the US trade war, which has escalated with the Trump administration threatening a 50% tariff on $20 billion of Canadian exports. This move is aimed at C$28 billion of exports, affecting items such as chemicals, plastics, forest products, dairy, wine & spirits, cement, horticulture, horsehair, and hockey sticks.
The second conflict is the hostilities with Iran, which have broadened to include attacks on tankers in the Red Sea. This has pushed oil prices up 7% for the week, with Brent hitting $100/barrel at one point and WTI ending close to $88.
The combination of these two conflicts has made life difficult for central bankers, particularly ahead of the FOMC meeting on Wednesday. The renewed threat to headline inflation from higher fuel prices is adding to pre-existing upward pressure on real interest rates.
As a result, US 10-year Treasury yields have reached an 18-month high above 4.7%, while shorter-term yields have also bounced, with 2s rising above 4.3%. Markets are now pricing in a one-in-three chance of the Fed hiking rates next week.