Iran Blocks US Ships in Hormuz as Oil Surges, Fed Hike Odds Jump

Iran is blocking U.S. and Israeli vessels from entering the Persian Gulf through the Strait of Hormuz, triggering a sharp jump in oil prices and reigniting fears of Federal Reserve interest rate hikes. West Texas Intermediate (WTI), the U.S. crude benchmark, rose over 2.85% to trade around $76.45 per barrel. Brent crude futures climbed 3.3% to $82.38 a barrel. The surge comes as Iran and Oman agreed to a shipping route through the Strait, but Tehran said it would not fully reopen the channel while the U.S. naval blockade remains in place. Iran is also considering legislation to ban U.S., Israeli and other hostile vessels from the strait, with fines of up to 20% of a ship's cargo for violations. The oil shock pushed U.S. Treasury yields higher along the curve. The 10-year Treasury note yielded 4.672%, up nearly six basis points, as markets began pricing in a potential inflation spike that would warrant a rate hike by the Federal Reserve. Money markets now price a 58% chance of a 25-basis-point rate hike at the Fed's September meeting. This is up from 30% on Wednesday, according to the CME FedWatch tool. The odds of the Fed keeping rates at the current 3.50%–3.75% range stand at 42%. The labor market remains resilient. Initial jobless claims for the week ending August 1 came in at 199,000, below the 201,000 forecast. Challenger job cuts dropped to a two-year low in July. Traders are now focused on Friday's Nonfarm Payrolls report, expected to show 80,000 jobs added, nearly double June's print. The unemployment rate is projected to remain steady at 4.2%. Wall Street reacted negatively. The Dow Jones Industrial Average fell 464 points, or 0.85%, to 53,885.10, ending a five-day winning streak. The S&P 500 lost 0.18% to 7,710.02, while the Nasdaq Composite slipped 0.06% to 26,348.35. Energy was the only gaining sector on the S&P 500, rising over 1%. Tech stocks were mixed. Memory chip maker Sandisk fell 6.8% after its fourth-quarter results failed to impress investors. Western Digital dropped 13% on weak forward guidance. AppLovin plunged 19.7% on mixed quarterly results. Salesforce fell 3.2% after announcing a management restructuring. San Francisco Fed President Mary Daly said she favors keeping policy unchanged and needs more data before committing. Fed Governor Lisa Cook supported holding rates but warned she is ready to act if disinflation stalls. Minneapolis Fed President Neel Kashkari told CNBC the central bank should start gradually raising rates now, saying three hikes by year-end is "not impossible". The Strait of Hormuz is a critical chokepoint through which about 20% of global oil passes. Deutsche Bank strategist Jim Reid noted that markets have seen "multiple false dawns" in this conflict and that attention is shifting from whether a deal can be reached to what the final arrangement will look like.