Wall Street slips as oil spike revives rate fears

Key takeaways

• The Dow fell 0.57 per cent as renewed U.S.–Iran strikes pushed crude prices higher and revived inflation concerns.

• Brent crude moved above $90 per barrel, while WTI climbed beyond $85 as traders assessed risks to shipping through the Strait of Hormuz.

• Markets priced in a roughly 66 per cent probability of a September rate hike following Federal Reserve Chair Kevin Warsh’s hawkish Jackson Hole speech.

U.S. stocks moved lower Monday as escalating military exchanges between the United States and Iran drove oil prices higher, adding to concerns that persistent inflation could force the Federal Reserve to raise interest rates in September.

During Monday trading, the Dow Jones Industrial Average fell 306.71 points, or 0.57 per cent, to 53,253.28. The S&P 500 declined 0.36 per cent to 7,683.81, while the Nasdaq slipped 0.31 per cent to 26,321.34.

Declining stocks outnumbered advancing issues by more than two to one on the New York Stock Exchange, reflecting a broad reduction in investors’ appetite for risk.

Crude rises as U.S.–Iran conflict escalates

Brent crude rose above $90 per barrel after the United States attacked Iranian rocket launchers on Larak Island in the Strait of Hormuz, marking its first strikes on Iran in approximately one month.

Iran subsequently retaliated against U.S. military targets in Jordan, renewing concerns that the six-month conflict could further disrupt one of the world’s most important energy-shipping routes.

Brent climbed approximately 2.5 per cent to $90.26 per barrel during European trading, while WTI crude advanced by a similar percentage to $85.51.

The increase benefits oil producers but raises costs across transportation, manufacturing and consumer-facing industries. Sustained energy-price growth could also feed into headline inflation and make it more difficult for the Federal Reserve to return inflation to its 2 per cent target.

Warsh raises expectations for September hike

The oil rally arrived as investors continued reassessing Fed Chair Kevin Warsh’s first Jackson Hole address.

Warsh said the Fed must be confident that underlying inflation is moving towards its target “clearly and at sufficient speed.” Otherwise, policymakers would still have work to do.

The Fed’s preferred annual inflation measure currently stands at 3.7 per cent, while the six-month reading is running at 4.1 per cent, according to Warsh’s prepared remarks.

Warsh also said financial conditions were not broadly restrictive and described the labour market as consistent with full employment. That combination suggests the Fed may have room to raise rates without immediately destabilizing employment.

Markets assigned a 65.9 per cent probability to a quarter-point increase at the Fed’s September meeting, according to CME’s FedWatch tool.

Barclays now expects two further increases during 2026, in September and December. The brokerage had previously forecast that rates would remain unchanged for the rest of the year.

What investors should watch

The market’s next direction will depend partly on whether the oil increase proves temporary or develops into a more persistent inflation shock.

Further restrictions on traffic through the Strait of Hormuz could lift energy and transportation costs across the economy. That would place pressure on company margins while strengthening the case for tighter monetary policy.

Investors will also be watching upcoming inflation and employment figures ahead of the Fed’s September 16 decision.

Despite Monday’s decline, the Dow, S&P 500 and Nasdaq remained on course to record monthly gains for August. The Nasdaq was leading the three benchmarks as continued enthusiasm for artificial intelligence supported technology shares.

The combination of higher oil prices and renewed rate-hike expectations presents a more difficult environment entering September, however. Expensive growth stocks, utilities and highly indebted companies may be particularly sensitive if Treasury yields continue rising.