Fed hike fears stalk stocks as Iran crisis lifts oil and yields
Oil and Treasury yields climbed as the Iran war intensified, pushing Fed rate-hike odds higher and putting fresh pressure on stocks.
By Sal Moretti · Money Reporter
3 min read
The odds of a Federal Reserve rate increase jumped toward one in three Wednesday as oil prices and Treasury yields climbed during the intensifying Iran war, according to market data cited by MarketWatch.
Fed-funds futures put the chance of a rate hike at the Fed’s meeting next week as high as 33.7% Wednesday before easing to 31.5%, according to the CME FedWatch Tool. That was up from 25.7% on Tuesday.
That shift landed in a market already leaning hard on technology shares. The current stock bull market is approaching its fourth anniversary in October, and FactSet data cited by MarketWatch showed tech stocks and the Magnificent Seven have powered much of the advance since 2022. The S&P 500 equal-weight index, which reduces the sway of megacap tech names, has lagged.
Keith Lerner, chief investment officer at Truist Advisory Services, told MarketWatch that oil and rates are now moving together in an uncomfortable direction. “Oil prices are leading interest rates up,” Lerner said, adding that the combination “complicate[s] the Fed story.”
Brent crude was back above $93 a barrel, near levels seen before a ceasefire, while the 10-year Treasury yield stood around 4.65%, close to its May highs, according to MarketWatch. The 30-year Treasury yield was at 5.154% Wednesday and was near its longest stretch above 5% since 2007.
Higher borrowing costs can hit Washington, companies and households at the same time. They can also pressure pricey growth stocks and smaller companies, two corners of the market that tend to feel rates quickly.
The Russell 2000 index, a small-cap benchmark, was down 0.8% Wednesday, according to MarketWatch. The S&P 500 was slightly lower at 7,504, while the S&P 500 technology sector was down 0.81%.
Markets also had a fresh geopolitical jolt. MarketWatch reported that President Donald Trump threatened Wednesday to use the U.S. military to bomb Iranian bridges and power plants if Iran’s regime fires on ships in the Strait of Hormuz.
Energy prices were feeding straight into the consumer story. Gasoline prices had moved back above $4 a gallon as the U.S.-Iran ceasefire fell apart, according to MarketWatch. Patrick De Haan of GasBuddy said on X that, based on conditions at the time, the national average could rise to $4.15 to $4.25 a gallon in the next few weeks.
De Haan also wrote that WTI crude was up more than 3% to $87, Brent was up 3.5% to $94 and RBOB gasoline futures were up 7 cents a gallon, as crude advanced and Houthi threats raised concern about a Saudi oil route through the Bab al-Mandab Strait.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, told MarketWatch he believed a Fed hike would be “counterproductive.” He said many on Wall Street expect one, but added that he thinks it “would be a mistake.”
Lerner said Truist still sees the bull-market trend as intact, according to MarketWatch, though he expects trading to get choppier after July as risks that seemed to be fading return.
For tech, the next test is earnings. MarketWatch noted that Alphabet was due to report quarterly results after the closing bell Wednesday, with investors focused on whether AI-heavy companies can keep delivering.
“The whole market is fixated on AI and the rotation,” Pavlik said. He added that rates are moving “in the wrong direction, as far as the market and economy is concerned,” while the Iran war has left investors with no easy answer.
This story draws on original reporting from MarketWatch.