Baker Market Update 2026-07-17

Geopolitical risk returned to the forefront this week as the U.S.-Iran ceasefire collapsed. Attacks on commercial tankers in the Strait of Hormuz prompted military exchanges between the two nations and the reimposition of a U.S. naval blockade of the Strait. Despite the severity of the escalation, energy markets responded with relative restraint. Brent crude traded near $85 a barrel heading into Friday — up more than 12% on the week, but still well below the wartime high of approximately $118. The muted reaction suggests markets are pricing in a near-term de-escalation, though the path to normalization for energy markets is by no means straightforward.

Global oil inventories, which were flush when hostilities first broke out in February, have since drawn down considerably. Meanwhile, alternative transit routes are increasingly at risk, as Iran has called on Yemen's Houthis to close the Red Sea oil route if the U.S. strikes Iranian power infrastructure. With both primary and secondary supply routes potentially in play, the current calm in energy markets may prove short-lived.

The notable bright spot for the week was Tuesday's Consumer Price Index (CPI) report for the month of June. Headline CPI rose 3.5% year-over-year, below the 3.8% consensus estimate, while core CPI — excluding food and energy — decelerated to 2.6% from 2.9% the prior month. The monthly reading registered its first decline in six years with the index falling 0.4% since May. The pullback in CPI mostly reflected a decline in energy costs, particularly a 9.7% drop in gasoline prices, a development unlikely to be repeated in July. The national average for gasoline has already risen to $3.86 a gallon, with further increases expected as oil prices respond to renewed hostilities.

Federal Reserve Chair Kevin Warsh offered little in the way of forward guidance during his congressional testimony on Monday, reaffirming the Fed's commitment to returning inflation to its 2% target while stopping well short of signaling any imminent policy shift. Rate hike expectations remain intact for later in the year. The renewed conflict in the Middle East has preserved the possibility of additional tightening should energy prices reignite broader inflationary pressures.

The economic calendar is light next week, with earnings season providing the primary market catalyst. The trajectory of oil prices and the evolving situation in the Gulf, however, are likely to remain the dominant variables shaping market sentiment as we move through the second half of July.

Have a great weekend!

Source: Bloomberg Finance L.P.