Anxious Over U.S. Inflation: Market Eyes Iran Instead of the Fed

Even past 9 p.m., domestic experts and investors overflowed as they waited for foreign breaking news. This was due to the release of the U.S. Consumer Price Index (CPI) late last night (August 12) Korean time. It was a new phenomenon, expanding a step further from previous habits of focusing solely on the U.S. Federal Reserve's interest rate decisions in the early morning hours. It demonstrates the sheer power of the "interest rate" variable that will determine the direction of the stock market in the second half of the year. Markets breathed a sigh of relief at the July CPI results. Although prices rose 3.4% year-on-year, this was down from 3.5% in June, and the month-on-month increase was 0.1%, both falling within market expectations. Core CPI, which excludes energy and food, rose 2.5% year-on-year, also lower than June's 2.6%. This was the effect of temporary stabilization in international oil prices during that period. Before the announcement, the market had estimated a roughly 51% chance that the U.S. Fed would freeze interest rates at the upcoming September FOMC meeting, but raised its expectations slightly to 60% immediately after the release.

However, the expected rally on Wall Street did not materialize, as major indexes closed mixed. What drove up AI and semiconductor-related stock prices was not relief over interest rates, but rather renewed AI optimism sparked by strong earnings from AI infrastructure-related shares. An unexpected reaction emerged, with analysts pointing out that "there is still one more inflation data release before the September FOMC meeting, leaving room for conditions to change." The market paid more attention to the possibility of inflation rising in August due to the recent rebound in international oil prices. It served as a confirmation that U.S. inflation has emerged as the eye of the storm in global financial markets.
Immediately after an ambiguous ceasefire, about 2,000 vessels managed to leave, but the Strait of Hormuz is currently virtually closed. Citing tracking data, The Wall Street Journal (WSJ) reported that on August 11, only 14 ships passed through the strait, 11 of which used routes controlled by Iran. This is far sparser than the pre-war volume of around 130 ships a day, an average of 33 ships a day in June, and 26 in July. The newspaper analyzed that "Iran's limited drone and missile attacks alone are fueling anxiety among shipping companies and insurers." Instead, more ships are opting to use routes managed by Iran, implying that despite Washington's rhetorical brush-off, Iran has effectively secured control over the strait. Brent crude futures, which had dropped to the low $70s per barrel in early July, rebounded to the $80–$90 range.

Trump claimed on August 12 (local time) that "the United States has full control over the Strait of Hormuz" and that "Iran is unable to respond to the U.S. naval blockade against Iran," but the reality at sea tells a different story. The New York Times (NYT) reported that Middle Eastern oil-producing nations, including the United Arab Emirates and Saudi Arabia, are pouring massive funds into constructing pipelines that bypass the Strait of Hormuz. Although negotiations are said to be underway, Iran has reiterated its conditions for reopening Hormuz: the withdrawal of U.S. troops from the Middle East, lifting the naval blockade against Iran, paying war reparations, and lifting sanctions and unfreezing Iranian assets. Under these terms, it would amount to a U.S. defeat. If things continue in this state, the bottleneck in crude oil transportation and the increase in costs are projected to move beyond prolonged disruption and become entrenched. Cold assessments suggest that oil-consuming nations will be left with nothing but financial losses and inflationary pressure.
In the U.S., where driving is central to daily life, the surge in consumer gas prices is severe. The psychological threshold of $3 per gallon for the American public has crumbled, with prices currently hovering around $4. In low-lying Western areas with high taxes and added logistics costs, prices have crossed the $5 mark. On August 12 (local time), U.S. political outlet The Hill reported the results of a poll conducted jointly by the British weekly The Economist and multinational polling firm YouGov, citing that 33% of respondents approved of President Trump's job performance while 62% disapproved. The survey was conducted among American adults from August 7 to 10. Although responses varied widely depending on political affiliation, it represents a plunge of around 20 percentage points compared to the start of his term in January last year.

The problem is that the ability to end the war on its own terms has diminished. Although the U.S. Department of Defense officially denied media reports that ammunition stockpiles used in the war against Iran were "dangerously low," dominant analysis suggests that, beyond conducting the war, considering the burden of maintaining deterrence in other regions such as the Asian island chain of strategic value, an offensive against Iran has effectively gone out the window in tandem with the November midterm elections. This is because any military action that heightens international oil price instability would amount to a political self-own under these circumstances. Grasping this point well, Iran is betting everything on controlling the Strait of Hormuz, thereby increasing the burden on the Trump administration—a tactic the market is also sensing. Unable to admit a de facto defeat, Trump is attempting to leverage the collapse crisis of the Iranian economy, which is suffering from a devastating annual inflation rate of 80% amid impoverished economic conditions. An ambiguous standoff and prolonged instability in Hormuz are currently the most realistic forecast. Consequently, speculation is rising that Trump may temporarily paper over the situation by securing nuclear-related concessions from Iran while accepting Iran's "service toll income" in Hormuz. For Asian oil-importing countries like South Korea, this would be an absurd outcome.
Assessments suggest that the U.S. Federal Reserve's FOMC meeting in July was a moment that hinted Chair Kevin Warsh might be a "hawkish in words only." By expressing a passive stance toward tackling inflation, saying, "Rate hikes can be part of the solution, but not the only answer." On Wall Street, even if he does not appear to directly accede to Trump's explicit demands for rate cuts, evaluations suggest it has become clear that he is continuously seeking grounds for rate cuts or freezes. Three FOMC meetings remain this year: in September, October, and December. Last month, U.S. non-farm payrolls decreased by 23,000 compared to June, a figure that was a whopping 106,000 lower than the expected "83,000 increase." The sluggish employment data, along with the July CPI, is raising expectations for a Fed rate freeze in September. However, the stance of some "hawkish" Fed officials remains firm. Boston Fed President Susan Collins said in an interview with the Financial Times (FT) on August 12 (local time) that "I hear more and more that low- and moderate-income households are struggling to make ends meet," adding that "we shouldn't place too much weight on a single month's job data."
It can be expected that the release of the U.S. August CPI following the rebound in international oil prices in August will pose another hurdle. Ultimately, the state of the U.S.-Iran war has become the largest variable determining the remaining three FOMC meetings. Furthermore, U.S. Treasury yields have already risen to their highest levels in 19 years. U.S. Big Tech firms, continuing astronomical investments amid the battle for AI dominance, are seeing their free cash reserves run dry. As market interest rates rise, borrowing costs for these companies increase, which could dampen demand for semiconductors—a core element of capital expenditure. This poses an inevitable blow to the South Korean stock market, which remains heavily reliant on semiconductors. The Trump administration's desperate efforts to prevent interest rate hikes were already evident on July 31 when it engaged in massive market intervention to bolster the yen. It was an unprecedented intervention born out of fears that if yen weakness deepened, Japanese monetary authorities might sell off large amounts of U.S. Treasuries to secure dollars, which in turn would push U.S. Treasury yields even higher. Yet even such responses become powerless in the face of a scenario where oil prices rise again due to the deadlock in the Strait of Hormuz. That is why global financial markets have no choice but to watch the Persian Gulf with growing anxiety.

※ Please note: This article was translated by AI and may contain errors.