Baker Market Update 2026-07-24

What began as a fragile ceasefire deteriorated rapidly this week into a full-scale resumption of hostilities in the Gulf. U.S. and Iranian forces have now been actively engaged in military action for twelve consecutive nights and traffic through the Strait of Hormuz has once again slowed to a trickle. Midweek, the conflict acquired a second front as Yemen's Houthi militia announced a naval blockade of Saudi Arabia and followed through by striking two Saudi oil tankers in the Red Sea, threatening both of the region's critical energy chokepoints simultaneously.

Energy markets responded accordingly. Brent crude, which opened the week near $90 per barrel, climbed steadily throughout the week, eventually breaking above $101 on Thursday, its first breach of that level since late May. Economists have warned that absent a near-term resolution, crude could reach $120 per barrel in the fourth quarter as winter fuel storage concerns move to the foreground. With the national average for gasoline already back above $4 per gallon and up more than 30% since the war began, the improvement in energy prices that drove June's favorable CPI reading is now in the rearview mirror.

The bond market responded as well. Two-year Treasury yields, the maturity most sensitive to Federal Reserve policy expectations, rose as much as 7bps on Thursday to 4.37%, the highest level since early 2025. The benchmark 10-year yield hit a year-to-date peak near 4.7%, and the 30-year touched 5.19%, approaching levels not seen since 2007. Markets are now pricing in approximately a 35% probability of a rate hike at the July 28-29 FOMC meeting next week, up from roughly 10% just one week ago. A quarter-point move is fully priced in by September.

President Trump also reopened a trade front with Canada this week, announcing 50% tariffs on approximately $20 billion of Canadian imports on Monday. This morning, the administration imposed new duties on imports from dozens of other countries as a means to replace an expiring 10% duty that the President imposed globally shortly after the Supreme Court invalidated some of the administrations previous levies. The taxes of 10% - 12.5% are expected to cover 99% of U.S. imports.

Adding further pressure to global bond markets, the Japanese yen fell to four-decade lows this week, a development with implications beyond Japan's borders. For years, investors have borrowed in yen at near-zero Japanese interest rates and reinvested those funds into higher-yielding assets elsewhere, including U.S. Treasuries (a practice known as the “carry trade”.) As the yen weakens and Japanese yields rise, that trade becomes less attractive and potentially costly to maintain, prompting investors to sell those higher-yielding assets and repay their yen-denominated borrowings. The resulting selling pressure ripples through global bond markets, pushing yields higher at a moment when U.S. rates are already under upward pressure from rising inflation concerns and a more hawkish Federal Reserve outlook.

Next week will of course be guided by the FOMC meeting on Wednesday and Thursday. Chairman Warsh's post-meeting statement and press conference will be the primary focus of the week with investors listening closely to what he says (or doesn’t say) about the current inflation and labor market outlook. Thursday also brings another important release, June’s Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation.

Have a great weekend!