EXECUTIVE SUMMARY
The conflict with Iran has moved decidedly away from the June 17 memorandum and entirely toward control of the Strait of Hormuz. What began as a tenuous ceasefire devolved into a return to all-out aggression this month, with a renewed blockade and increasing sanctions, rising crude, and the first U.S. servicemember deaths in months. Temporarily sidelined, the Houthis have now begun striking Saudi tankers in the Red Sea, expanding the conflict’s theater beyond the Persian Gulf, while Iranian missiles have repeatedly hit U.S. bases throughout the region. Crude once again breached the $100 mark—the first time since May. The receding inflation data prints of June may thus prove to be a temporary reprieve as central banks meet this week for rate decisions. But as is typical of the conflict’s ebbs and flows, both sides spent the weekend deescalating and oil futures have responded favorably as today’s early trading digests the news.
The on-again, off-again hostilities and blockade of Hormuz continue to test the global supply and the price tolerance of consumers while producing efficiencies and infrastructure that will long outlive the conflict. Despite the innovations of the market, the present inflationary picture will weigh heavily on the FOMC. June’s inflation print was likely the last good one the U.S. should expect for some time. Headline falling to 3.5% and core flat are positive signals, though unlikely to hold so long as the conflict remains undecided and available shipping, refinery, and strategic supplies already stretched to their max. Diesel margins are back to record levels and gasoline above $4, realities that will spread throughout the economy during the third quarter. Hence the Administration’s carve-out for oil, gas, fertilizer, and food under the new Section 301 forced-labor tariff regime. Fed Chair Kevin Warsh told Congress on July 14 that the job was not done—he may very well have to follow-through on his assertive statement earlier than expected.
The constant behind it all remains the Administration’s trade regime. With IEEPA giving way to Section 122 and now Section 301, President Trump continues to wield the tariff cudgel far and wide, with new actions taken against Brazil and Canada, as well as a non-tariff digital trade irritant reaching a boil with the EU. Also constant is the Chinese economy’s reliance on mass exports to prop up a domestic economy that continues to miss consumption expectations. Despite U.S. bans and growing frustration within the EU, China still has willing buyers for its million-a-month auto exports.
Our final item revolves around an AI technology gap that has decidedly closed despite unprecedented private sector spending and U.S. export controls. The Administration continues to squeeze Chinese access to physical inputs such as advanced lithography, leading-edge chips, and air-gapped clouds. But Chinese open-weight models that likely benefited from disguised distillation and smuggled Western chips, have upended the AI policy debate in Washington with performance matching American frontier models at 40% of the price. A private sector rift is now dividing the Western ecosystem between safety and innovation. All the while, China is standing up an alternative AI coalition composed of the Global South, developing countries, and rogue nations. Pax Silica remains the Western counter, but without an answer to the pricing problem, the U.S. industry could soon find itself behind its Chinese counterparts for the first time in this fast-moving and existential race.
THE FIVE TAKEAWAYS
- The Iran war has become a fight over shipping lanes, and it has drawn American blood. Iran killed two U.S. service members in missile strikes on the Muwaffaq Salti Air Base in Jordan, the first American fatalities since March. Meanwhile, the Houthis reentered the fray, striking two Saudi tankers in the Red Sea and threatening an active Hormuz workaround. Crude breached $100 for the first time since May, threatening the June inflation reprieve. At the end of last week, Trump said he was weighing “a massive attack, bigger than ever before,” with Kharg Island and the Pickaxe Mountain nuclear complex both under consideration. But after a weekend spent at the White House, the President seems inclined to now pursue de-escalation as the week opens. Brent has responded in kind, now below $90.
- The AI buildout is now a credit story, as the bond market questions ROI and raises the cost of financing. The six largest AI borrowers have issued $182 billion of investment-grade paper this year, and creditors and investors are punishing the long end through higher yields and equity hits; Alphabet posted $112 billion in quarterly profit, then raised capex to $205 billion and reported negative free cash flow. Gulf sovereign capital is filling the gap as Saudi Arabia and the UAE show signs of friction, with the United States rewarding each for its continued alignment and patronage.
- The global tariff regime was replaced, as expected, with Section 301. Section 122’s 10% surcharge expired on July 24 and was immediately replaced by Section 301 forced-labor duties of up to 12.5%. A long list of exemptions points to the Administration’s inflation concerns, with oil, gas, fertilizer, and food carved out to spare consumer prices. The tariff burden is here to stay and is now as durable as ever. Inflation has turned less on trade than it has on energy, strengthening the case for a Fed rate hike before December.
- Washington punished Canada with a dormant 1930 statute and rewarded Mexico the same day. Three proclamations under Section 338, the Smoot-Hawley Act, imposed 50% tariffs on roughly $40 billion of Canadian autos, alcohol, and dairy, with no expiration and no USMCA carve-out. The energy and potash exemptions split Alberta and Saskatchewan out of Canada’s retaliation coalition before it could form. A 30-day statutory clock leaves room for a deal before the duties take effect. Meanwhile, Ambassador Greer finished his third bilateral round of USMCA talks with a “pragmatic” Mexico, citing progress but remaining issues tied, as always, to rules of origin. USTR’s goal for both negotiations is interim bilateral agreements by year-end.
- Beijing has built an alternative AI infrastructure regime, while Washington weighs more controls. Twenty-nine countries founded the Shanghai-headquartered World AI Cooperation Organization, and Moonshot released Kimi K3, bifurcating global AI alliances through its perennial weapon of cheap products shipped widely. Pax Silica still reigns supreme, but U.S. corporate use of Chinese models is rising as the AI race enters a pricing phase. The Administration is weighing procurement limits and Entity List designations, a fight that is splitting U.S. engineers and investors into safety and innovation factions.
KEY DATES AHEAD
The week will be dominated with G10 central bank decision-making, with most expected to hold, as well as key inflation and GDP data. On the legislative front, the U.S. Senate remains in session and could take steps towards codifying significant policy (e.g., government funding, Russian sanctions, digital assets, and/or war supplemental funding).
TODAY: Canada opens Gordie Howe International Bridge; China June industrial profit figures; Moonshot publishes the full weights of Kimi K3; Japan June PPI data; Bank of Pakistan interest rate decision; Singapore interest rate decision
TUESDAY: Senator Lindsey Graham’s (R-SC) funeral at the National Cathedral in Washington (various world leaders expected to attend); U.S. Conference Board releases July consumer confidence index; Chile’s central bank interest rate decision; Keiko Fujimori inauguration as president of Peru (U.S. delegation led by Deputy Secretary of State Christopher Landau to attend)
WEDNESDAY: Fed’s interest rate decision; Microsoft, Meta, and SK Hynix report earnings; Australia June CPI data
THURSDAY: Commerce Department releases PCE index (Fed’s preferred inflation measure); U.S. Bureau of Economic Analysis releases first estimate of second-quarter GDP; Apple, Amazon, and Samsung report earnings; Bank of England (BoE) interest rate decision; EU flash Q2 GDP estimate and June unemployment figures; France flash Q2 GDP estimate; Germany July CPI and preliminary HICP inflation rate data
FRIDAY: University of Michigan final consumer sentiment survey for July; U.S. oil and gas majors report earnings (Chevron and ExxonMobil); Canada May GDP estimate; EU July HICP estimate; France CPI and June PPI data; Germany June and Q2 labor market statistics; Bank of Japan (BoJ) interest rate decision
AUGUST OUTLOOK
– Cyber executive order deadline; Venezuelan joint agenda begins (August 1)
– OPEC+ meeting (August 2)
– Abelardo De La Espriella inauguration as president of Colombia (August 7)
– South Carolina holds Republican primary for Graham vacancy (August 11)
– MOU deadline for a U.S./Iran nuclear agreement (August 18)
– Section 338 tariffs take effect on Canada absent a deal (August 19)
SEPTEMBER LOOK AHEAD
– 4th round of U.S./Mexico trade talks (TBD, Washington)
– Congressional consideration of war supplemental possible (budget reconciliation 3.0)
– Trump/Xi summit (~September 24)
– Government funding expires (September 30)
SECTION BOTTOM LINES
GEOPOLITICAL UPDATE: The Iran campaign has no legislative constraint until roughly September 8 and is yet to demonstrate a durable diplomatic off-ramp. With centrifuges reportedly moved into Pickaxe Mountain and both capitals publicly committed to retaliation, shipping remains the first hurdle for the two sides to clear. Watch the hard facts, not the rhetoric: Senate progress on the war supplemental and the Saudi response to the President’s normalization demands.
OIL SHOCK: The lowered barrel consensus of June assumed a normalizing Gulf and a more generous surplus than originally anticipated. Both glimmers of good news faded in July. The IEA cushion is three-quarters spent, the Red Sea workaround has been struck, and seven million barrels a day of Russian exports sit under a live secondary-tariff threat. The refined-products squeeze—diesel futures up 26% this month—will ripple throughout the global economy. Industry ingenuity produced by market efficiencies may very well solve the long-term chokepoint of Hormuz, but the near-term pain remains.
SHIPPING: The 20% Hormuz levy is withdrawn, but its premise remains a dispute at the heart of the recent hostilities. Rubio says it is not America’s job to protect global shipping forever, and the toll is being collected instead through Gulf investment commitments. The blockade may yet lift again, but Iranian control of the strait must permanently relax for any de-escalation to hold. All else remains on hold for now: sanctions relief, frozen assets, and the nuclear question.
ECONOMIC OUTLOOK: The AI trade is now a financing and pricing story. While the U.S. continues to dominate the sector and attract capital, industry and investors are struggling with how to respond to the new dynamic. Meanwhile, June was likely the last clean print for the foreseeable future. Core inflation went flat, but on a squeezed consumer, and the energy relief has since reversed. With energy concerns again on the rise, the July and August prints face strong forces pointing in the same inflationary direction. The market is priced for a rate hike before the end of the year and Fed Chair Warsh has said the job is not done.
TRADE UPDATE: The July 24 sunset closed one authority but not the administration’s trade agenda. Section 301 replaced Section 122 with no gap, Section 338 was tapped for the first time in history to bring Canada to the table, and the DOJ is finding success in the courtroom. The EU fine on Google shows that even once agreements are reached, specific irritants will keep prompting a response. Losing IEEPA did not weaken the playbook—it hardened the tariff regime and multiplied the paperwork.
DONROE DOCTRINE: The Donroe Doctrine is inherently defined by national security but underneath, it reaches into the region’s financial plumbing. The new 25% tariff on Brazil is aimed squarely at its Pix payment system, while Treasury controls Venezuelan oil revenue and secondary sanctions rock Cuba’s financial model. Colombia and Peru formally enter U.S. alignment in the coming days and weeks, joining recent entrant Venezuela, though the latter remains a delicately managed transition. Brazil is the regional resistance test case: Lula appears stronger and his government is retaliating, but the October presidential election will ultimately decide its long-term approach to the Doctrine.
CHINA: The export control regime works on atoms but it fails on bits. Chips, lithography, and air-gapped clouds can be effectively rationed; open weights cannot. Chinese models now take up to 46% of U.S. corporate token usage and Beijing is shoring up its alternative global AI regime. Whether Washington responds by competing on price or by restricting access is the decision that the American stack is nervously watching. As Trump and Xi prepare for their September visit, the Board of Trade and renewed purchases are the publicly touted successes. The more consequential disputes have gone largely unacknowledged but both sides have accelerated their clandestine countermoves.
OUTLOOK / ANALYSIS
The near-term question is whether the Federal Reserve moves in September, and the answer now depends less on the labor market than on the Strait of Hormuz. The two forces that might have offset each other in the summer prints are beginning to align: crude breached $100 and the tariff burden has hardened. Warsh has told Congress plainly that he does not regard the job as done, and he has a dot plot already tilted toward tightening. Markets are priced for December. If diesel margins and gasoline hold at current levels through the July and August prints, the offsetting gap closes further and validates the Chair’s warning. The most rate-sensitive corner of the equity market, small caps that have been a recent favored trade, is exposed to more floating-rate debt than any other segment.
The war’s trajectory is the largest single variable and it remains too difficult to predict. From escalating strikes to de-escalating talks, there is no way to know when Hormuz will stabilize, if ever. Kharg Island, the Pickaxe Mountain complex, and Iran’s power grid will continue to factor into Pentagon war-planning. But the Senate’s progress towards adopting a Republican-only war funding supplemental will determine whether the President continues to have his full range of options. While the energy sector quickly adapts and represents the long-term solution for normalized supply, the interim 12-18 months can only be solved by one of two outcomes: a fulsome military campaign or a durable ceasefire.
There is no longer a question of whether the President’s global tariff regime will remain. Nor is it in question whether the President will use the threat of additional ad hoc tariffs to force favorable outcomes—he will. All that remains is who, and what issues, will be his next target. Litigation over IEEPA refunds, Section 301, and now Smoot-Hawley will be ongoing, but the Administration’s lawyers have gained ground. Next up is the math behind the Section 301 overcapacity investigation, an August 19 effective date for the Canadian tariffs, and a newly opened Section 301 investigation on EU digital trade barriers. Also settled is the structural fate of the USMCA review. The trilateral is a dying concept and is likely to be replaced by eventual bilateral agreements with a goal of reaching interim frameworks by year end. Rules of origin will remain the largest issue to solve with Chinese transshipment as the organizing concern.
We end the note with an AI story that has seemingly emerged overnight. Beijing now has an institution, a free frontier model, and 46% of U.S. corporate token usage. Washington has the lithography, the leading-edge chips, and a decision to make about whether to compete on price or restrict access. Innovation and safety are dividing American tech and highlighting the urgency of remaining on top of the fast-paced race. The capital cycle’s evolution from exuberance to skepticism is constraining U.S. giants for the first—and possibly worst—time. Recent earnings and record profits have been dwarfed by capex concerns. Amazon, Meta, and Microsoft all report this week and will prove whether the trend continues. Meanwhile, China’s advance suffers from no such constraints, which is on full display today as Moonshot publishes the full weights of Kimi K3 and CXMT shares soar almost 500% in their trading debut.
Full analysis can be found here.