<Market Analysis> Inflation Tremors Are Here: Crude Oil Breaks Above $100 as the Fed Builds Its Last Line of Defence

Most major macro asset classes are under pressure amid a strengthening US dollar, with crude oil being the notable exception. The foundation of the dollar’s strength is the steadily intensifying threat of inflation, driven in large part by Trump’s tariff policies and the US-Iran war.

With less than two weeks to go before the US midterm elections, Iran appears to be stepping up pressure on oil prices. Saudi Arabia has come under repeated attacks, while reports have also emerged of oil tankers transiting the Strait of Hormuz being targeted. Although indirect negotiations between the US and Iran remain possible and the attacks have not escalated further, financial markets are clearly on edge. Brent crude has held firmly above $100 this month, while US crude has repeatedly tested the key psychological threshold of $100 this week and has now broken above it.

At this critical juncture, the Federal Reserve has little choice but to maintain its hawkish stance to contain inflation expectations. This pushes US Treasury yields higher and bond prices lower. Rising funding costs, in turn, weigh on US equity valuations and increase financial pressure on companies. Meanwhile, higher nominal interest rates drive up real yields, creating further downside pressure on gold, a non-yielding asset, even at elevated price levels.

One particularly interesting feature of this cycle is that, while inflation remains broadly manageable for now, some countries are experiencing fiscal strain from the oil price shock. To sustain government finances, they have been selling gold at elevated prices. As a result, rising oil prices have not necessarily lifted gold alongside inflation expectations; instead, gold selling has become another source of downward pressure on prices.

Ultimately, under Trump's leadership, major spending initiatives—often presented under grand and noble banners—continue to advance aggressively, despite persistent long-term fiscal challenges. At the same time, the AI industry is bringing the world closer to a potential technological singularity, creating enormous demand for capital precisely when funding is needed most.

Even if the Federal Reserve has an inherent inclination towards monetary easing, the inflation threat leaves it little room to indulge that tendency. Instead, it must adopt a more hawkish stance and tighten the liquidity taps.

Once these dynamics are understood, it becomes clear that the underlying drivers of today's major macroeconomic and financial markets are closely tied to Trump’s policy agenda. While the Federal Reserve deserves close attention, the White House may be an even more important place for markets to watch.

Joseph Lin
Market Analyst of Hantec Group