- Iran released a restrictive draft for traffic through the Strait of Hormuz.
- Market participants are awaiting the crucial US nonfarm payrolls report.
- Fed’s Neel Kashkari said it was time for the Fed to start hiking interest rates.
Interest futures collapsed on Thursday, giving back most of this week’s gains after reports of a restrictive draft plan for traffic through the Strait of Hormuz. The bond market had recovered this week as tensions between the US and Iran eased, giving room for talks. Meanwhile, market participants are eagerly awaiting the US nonfarm payrolls report for cues on Fed policy.
The week started off well, allowing interest futures to recover from lows hit in the previous week. The shift came over the weekend after Trump cancelled a planned attack on Iran, saying talks would resume on Monday. Furthermore, the US Treasury Secretary told reporters the US could reach a deal with Iran on Tuesday or Wednesday.
The US, Iran and Oman have been holding talks to reopen and manage traffic through the Strait of Hormuz. These talks have put a pause on strikes, sending oil prices lower. A drop in oil eases inflation worries, putting downward pressure on Treasury yields. Meanwhile, interest futures gain.
However, this bullish trend reversed on Thursday after reports that Iran had released a restrictive draft for the deal. According to the draft, Tehran plans to ban US and Israeli ships from using the Strait. Oil and Treasury yields soared after the news while interest futures collapsed.
US NFP estimates (Source: Bloomberg, Bureau of Labor Statistics)
Elsewhere, market participants are awaiting the crucial US nonfarm payrolls report. Economists believe the economy added 85,000 new jobs in July compared to the previous reading of 57,000. Meanwhile, the unemployment rate could hold steady at 4.2%. The actual reading will shape the outlook for Fed policy.
On Wednesday, Fed’s Neel Kashkari said it was time for the Fed to start hiking interest rates. Traders were pricing a 59% chance of a hike in September. The likelihood fell as geopolitical tensions eased and oil prices pulled back.
“Corporate earnings are through the roof. They’re doing great. The consumer is hanging in there. The labor market is hanging in there. I look at this constellation and I say, what evidence do I have that monetary policy is particularly restrictive right now?” he said on CNBC’s “Squawk Box.” “So, I argued, now is the time to start slowly moving up as we get more data in.”
