Give Them An Inch…

By Bas van Geffen, senior macro strategist at Rabobank

Talks between Iran and Oman on the reopening of Hormuz are reportedly inching ahead, as Iran continues to give the US the silent treatment. Negotiators said that a deal to establish a safe shipping route was close, but Iran may now be exploring just how much it can extract from the US in return.

Last week, Iran had already said that any deal with Oman would be contingent on the US lifting its blockade of Iranian ports. On Friday, a US official told Reuters that the administration agreed to this. The US blockade would end once a deal is announced that “restores commercial shipping without impediments.”

But give them an inch and they’ll take a mile. Tehran added new demands over the weekend, saying that the Strait of Hormuz will not reopen unless the US meets “a number of requirements.” These demands largely seem to refer to the original memorandum of understanding. Iran’s additional demands include the US ending all hostilities and withdrawing its troops from the area. Iran also wants Washington to pay billions in war damages and lift sanctions on the country.

Or do the additional demands reflect division between Iranian camps, and varying levels of distrust of the US? The strait remains a key point of geopolitical leverage – at least until planned alternatives for oil exports are all fully operational.

Meanwhile, the US president appears to be divided on the war as well. The Wall Street Journal reported this weekend that Trump had been willing to walk away without any agreement on Iran’s nuclear programme, claiming victory if the strait reopens. However, Iran’s additional demands may have torpedoed that plan.

Netanyahu rejecting the Board of Peace plan for Gaza is a further complicating factor. The Israeli prime minister indicated that he will not withdraw troops until Hamas fully disarms.

So, yesterday, Trump told Axios that he was “low-keying it,” waiting for the economic damage to build: “We are only semi-negotiating. We are just watching Iran with its huge inflation and the fact they have no money.” Yet, the longer this persists, the more economic damage could build in the US and other parts of the world as well.

Energy markets started the week off cautiously after all this. Brent futures are marginally higher, but traders seem reluctant to take big positions given all this on-again, off-again news. Equity markets seem to have shrugged off the weekend news flow entirely, perhaps partly aided by US economic data.

Following Friday’s employment report, the case for a Fed hike is weakening, but it is certainly not yet done for. The headline payrolls number disappointed, with a -23,000 jobs print and a 37,000 downward revision to the June estimate. In contrast, unemployment declined from 4.2% to 4.1%, but the underlying data indicate that this was due to a big fall in labour supply that outpaced the decline in household employment.

Our US strategist noted earlier that employment growth has been slowing for several months, and Friday’s report confirmed that downside risks to the labor market have not disappeared entirely since the three insurance cuts last year. This could strengthen the argument of the Fed’s doves. Yet, the employment report also allows the hawks to argue that the labor market is mostly suffering from supply constraints, even if they are a little less confident in their case than before.

In short, the labor market data may have removed some urgency, reducing the odds of a September hike. However, incoming inflation data remain key.