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The US-Israeli war against Iran is escalating again and oil prices are rising, but experts say that the real indicators of the state of the economy do not go beyond the indices and their prices.
“Markets have been down for the last month or two, but they’ve changed since the war in Iran started,” said Michael Klein, a professor of international economics at Tufts’ Fletcher School.
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The yield on 10-year US Treasury bills, for example, has risen nearly 60 basis points since the start of the war in Iran in late February to 4.6 percent on Monday. That’s the highest level that yields, the bellwether for inflation, have reached in the past year, Klein said, making it more expensive for businesses to borrow money and shrinking the economy.
“The interest rate on the bonds will include the rate of inflation because the borrowers, when they are repaid, want to be compensated for the loss of their capital, which is caused by inflation,” Klein said.
It also shows that investors are expecting inflation to rise as much as the Strait of Hormuz, the chokepoint through which 20 percent of the world’s oil traveled before the war, continues to be almost closed after a short break when the flow of goods picked up in the days after the US and Iran signed a memorandum of understanding to increase their end.
That brief opening appeared consumer priceswhich decreased by 0.4 percent in June month. That was led by lower energy prices, including a 9.7 percent drop in gasoline prices, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI).
But a month after the deal was signed, and days after it appeared to have collapsed, benchmark Brent crude reached $91.42 a barrel on Sunday, before falling to $88.04 on Monday. The average US pump price for a gallon (3.78 liters) of gasoline was $4, up from $3.87 a week ago.
“Markets are looking ahead. People are discounting what Trump says about war because he says one thing every day,” Klein told Al Jazeera.
Traders now see a 55 percent chance of a US interest rate hike in September, according to CME Group’s FedWatch tool.
Rachel Ziemba, senior associate at the Center for a New American Security, admits that last month “went from a high level of optimism about the oil situation” as oil prices sold even before the MoU was signed and behind a large increase, to “a correction last week when the MoU was collapsing and the risk of conflict was increasing”.
In the period before and after the signing of the agreement on June 17, there was more oil than there were tanks to carry as the blockaded ships exited the Strait of Hormuz, causing prices to drop. “This did not fit into the long-term framework,” Ziemba said.
But now, with short-term supplies down, prices are rising again.
“Oils such as petrol and diesel are cheap compared to crude oil, and that’s when consumers feel bad because you can’t drive a tractor or a car on crude oil,” he said.
Besides the closure of the Strait of Hormuz, other major refineries around the world are also producing less.
For example, refineries in the Middle East are slowing production due to Iran’s destruction. Likewise, Russian factories have also been hit hard by Ukrainian drones and are producing less.
“Even when oil prices went down, oil prices were not going down because of this shortage,” Ziemba told Al Jazeera.
Government support has become more expensive
Based on this, the S&P 500 is down 0.81 percent last month, the Nasdaq-100 is down 5.66 percent, while the Dow Jones Industrial Average is up 0.53 percent at 51,839 points, after reaching a peak of 53,055 on July 6.
“Funds have become more stable,” said Mariano Torras, chairman of Adelphi University’s economics and finance department. “There is a significant risk that the situation could get much worse and there could be consequences for food and security around the world, but the markets seem to be setting the stage for longer-term risks.”
Economists are warning about food security because once the problem is closed, the prices of things that use energy like fertilizers will rise. As the Global South moves into its sowing season, developing countries in Africa and South America, in particular, will be hit hard. Even countries like India, which consume a lot of fertilizer for each crop produced, could increase food supply, Ziemba said.
“Results will depend on when the deficit ends,” he said. “The best case is that prices are higher than last year. However, the biggest problem is the big blockade, and the drought in some countries of the world.”
Torras admitted that other parts of the world could look “more”. But this was not reflected in the stock markets.
“There is a feeling that everything will be fine because the government and the US Federal Reserve will step in and help as they have done in the past,” he said, referring to past events including the East Asian crisis in the late 1990s, the 2008 financial crisis in the US and the support provided by several central banks during the COVID-19 pandemic when businesses have slowed down.
“Wall Street is raising prices in the hope that they will get help from the government because if there is too much panic, everyone loses and they have to do something.
Fletcher School’s Klein agrees.
“Markets go up, and markets go down. It’s a mistake to focus too much on daily or weekly or even monthly fluctuations.” As economist John Maynard Keynes said, markets respond to public opinion.
