Macro: US-Iran negotiations have reached an impasse; remain vigilant as tensions escalate

[Market News]

1. Middle East Situation:

① U.S. President Trump stated on social media that Iran is demanding compensation for losses caused by military conflicts over the past five months, a demand that had never previously been raised in bilateral negotiations. Trump said he has instructed U.S. representatives to formally present this compensation request in all future talks.

② In an interview with Real America's Voice, U.S. President Trump said the United States has three 'strategies' regarding Iran: first, monitoring how much its situation deteriorates; second, launching strong strikes against it; and third, applying economic pressure. Trump also claimed that the U.S. controls substantial Iranian funds and assets, saying, 'These are entirely under our control.'

③ A Saudi Arabian vessel was attacked in the Bab el-Mandeb Strait, resulting in at least three deaths.

④ Iran: The strait will not reopen unless the United States accepts Iran’s conditions.

⑤ U.S. officials stated that American forces fired upon a Panamanian-flagged vessel attempting to break through Iran’s port blockade. (Jinshi)

2. Federal Reserve’s Hammack: Current inflation has not yet returned to target levels, and the Fed may need to implement multiple rate hikes. She noted that the longer the Fed waits, the harder it becomes to bring inflation back to 2%. The labor market currently shows no significant issues, and July’s employment data will not shift her focus away from inflation. Markets can only support the Fed—they cannot replace the Fed’s actions. At the Fed’s July policy meeting, Hammack opposed holding rates steady and favored a 25-basis-point rate hike. (Jinshi)

[Nanhua Insights]

1. Previously, Trump repeatedly stated that the U.S. and Iran would soon reach an agreement and that the strait would reopen shortly, indicating Washington’s preference for resolving the issue through negotiations. However, Iran remains skeptical of U.S. credibility and demands greater goodwill from Washington, including conditions the U.S. is unlikely to accept—such as lifting sanctions and war reparations. Now, Trump has reversed his optimistic tone from just a week ago and announced that the U.S. will formally demand compensation from Iran in upcoming talks. This statement has nearly shattered earlier market expectations of a negotiated settlement, causing oil prices to rise sharply. With both sides now demanding war reparations from each other, although open conflict has not yet resumed, Iran continues periodic attacks on Saudi Arabia. If the U.S. undertakes military action against Iran—either for convoy protection or retaliatory strikes—the situation could escalate further. In the short term, crude oil is in a wide trading range, making trading strategies particularly challenging.

2. At the July policy meeting, Hammack already leaned toward a 25-basis-point rate hike, arguing that the labor market currently shows no significant stress and the economy has not been noticeably restrained, making this an opportune time to raise rates. Preemptive tightening, she believes, could more quickly curb inflation. Market expectations are now rising for a preemptive rate hike by the Fed in September, based on the view that acting while the economy remains resilient—but showing signs of weakening—would allow the Fed to retain policy initiative. Once the economy significantly deteriorates, the Fed’s policy space will shrink, making inflation control even more difficult. The Fed’s core focus remains inflation, and markets are now awaiting July’s CPI data.

Author: Zhai Shuainan, Macro and Asset Allocation Analyst, Nanhua Research Institute (Registration No.: Z0013395)

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