Wall Street’s recession fears outweigh inflation concerns as bond yields drop despite oil prices exceeding $102

(SeaPRwire) –   Bond yields are declining once more, as President Donald Trump’s conflict with Iran appears set to sustain elevated oil prices, shifting the economic focus from high inflation to a potential recession.

Prior to the conflict, yields softened on anticipation of Federal Reserve interest rate reductions as inflation moderated. The war then pushed yields higher after surging oil prices unsettled the inflation and Fed outlook. Now, the possibility of rate cuts is re-emerging.

Given Iran’s continued firm control over the Strait of Hormuz, which positions the regime as the guardian of one-fifth of global oil and LNG supplies, the energy market disruption is too significant to be reversed by a Trump social media statement.

Even as he asserts that negotiations with Tehran are progressing, oil prices climbed further on Monday. West Texas Intermediate rose 2.7% to exceed $102 per barrel, while Brent crude increased 1.7% to over $114. Concurrently, the 10-year Treasury yield dropped 9 basis points to 4.35%.

According to AAA, the oil surge has also driven the average price for a gallon of regular gasoline to $3.99, a $1.01 increase from last month. Diesel, a crucial industrial fuel impacting shipped goods like food, has risen even more sharply, reaching $5.416 per gallon.

“Oil prices are up again this morning, but Treasury yields are down as threats to economic growth start to outweigh inflation risks,” Oxford Economics stated in a Monday note.

Michael Brown, a senior research strategist at Pepperstone, noted that Trump’s efforts to verbally calm the market are now yielding diminishing results, with investors requiring tangible proof of concrete de-escalation measures.

In a note on Monday, he further commented that the market has at last recognized that expectations for central bank interest rates were excessively aggressive.

“As I’ve been emphasizing, the energy price shock will undoubtedly boost near-term headline inflation, but it will also represent a major negative demand shock, creating substantial headwinds for growth that would only worsen if G10 central banks tighten policy,” Brown wrote.

Meanwhile, the Iran war is moving toward a significant escalation and a prolonged duration. This past weekend, 2,500 U.S. Marines landed in the Middle East, with thousands more on the way ahead of an expected ground offensive aimed at reopening the Strait of Hormuz.

In retaliation for a ground invasion, Iran’s Houthi allies in Yemen could strike vessels in the Red Sea, stopping the flow of oil and cargo along a route used to circumvent the Strait of Hormuz. This would send oil prices even higher.

Last week, Bank of America Research economists estimated that if U.S. oil prices remain between $80 and $100, inflation risks significantly exceed unemployment risks, making Federal Reserve rate increases the most likely outcome.

However, they added that above this “Goldilocks” oil price range, inflation risks begin to decrease and move toward aligning with a growing unemployment threat.

“Inflation risks should increase at first but then decline if the shock is sufficiently large, due to demand destruction,” BofA said. “Negative wealth effects from a prolonged stock sell-off would intensify downside risks to the labor market and cap the potential for higher inflation.”