Hormuz diplomacy cools oil, Japan's yields hit a 30-year high, and Trump hosts Xi at the White House

The oil price drop today is a good example of how a commodity market prices future supply, not just today's. When traders heard that negotiators were discussing reopening Hormuz, they revised their estimate of how much oil would reach the market over the coming months. That revised expectation pushed the price down before a single extra barrel had moved. This is what economists mean when they say markets are forward-looking: the price reflects the best current guess about the future, and it updates the moment new information arrives.

The honest caveat is that one round of talks in New York is not a deal. The 2015 nuclear agreement, the last time the US and Iran came close to a durable arrangement, took two years of negotiation and collapsed within three years of being signed. What is different now is that both sides have a concrete, measurable ask: Iran wants the blockade lifted, the US wants the strait open. That clarity makes a phased deal easier to structure than a broad nuclear framework. But it also means each side has a strong incentive to pocket the first concession and stall on the rest. If talks break down after a partial reopening, oil could spike harder than it fell today.

Japan spent most of the period from 1995 to 2022 with interest rates near zero, a policy designed to fight deflation, which is a sustained fall in the general price level. During that time, Japanese investors poured money into higher-yielding assets abroad because domestic bonds paid almost nothing. Now that Japan's inflation has stayed above target for several years, the Bank of Japan has allowed rates to rise, and the yield curve has steepened sharply. A steeper yield curve means the gap between short-term and long-term rates has widened, which signals that markets expect inflation to persist rather than fade.

The precedent that comes to mind is the partial unwinding of the yen carry trade in mid-2024, when a surprise Bank of Japan rate rise triggered a sharp reversal of positions held by investors who had borrowed cheaply in yen to buy higher-yielding assets elsewhere. That episode caused a brief but severe sell-off in global equities and bonds. The situation today is slower-moving, a gradual yield rise rather than a shock decision, which gives investors more time to adjust. But the direction is the same, and the stock of Japanese money parked abroad is still very large. If yields keep climbing, the repatriation flow could become large enough to matter for US Treasury yields at a moment when the Fed is already struggling with inflation.

Xi's call for cooperation on AI is worth taking seriously as a piece of strategic signalling, even if nothing was signed. Both governments know that the country that sets the technical standards for AI, the rules about how systems are built, tested and deployed, will have enormous influence over the global technology industry for decades. The US has used export controls, which are restrictions on selling advanced technology abroad, to slow China's access to the most powerful chips needed to train large AI models. Xi's invitation to cooperate is partly a bid to soften those controls by framing AI as a shared challenge rather than a competitive one.

The realist reading of this summit is that both sides are managing a rivalry, not ending it. Trump's tech-heavy guest list tells you what he thinks the summit is for: reassuring American business that the relationship is stable enough to keep investing in China-linked supply chains. Xi gets the optics of being received at the White House, which matters domestically. What I find telling is that Trump said he wants to "leave it exactly where it is" on AI, meaning he is not ready to lift chip controls. That is the one concrete ask Xi brought, and it was quietly refused. The dinner was warm; the answer was no.

The Fed's decision to raise rates is a textbook example of the transmission mechanism of monetary policy: the central bank raises its benchmark rate, commercial banks charge more to lend, mortgage rates rise, fewer people can afford to buy homes, construction falls, and the economy slows. The intended effect is to reduce spending and bring inflation down. The problem the Fed faces right now is that inflation is being driven partly by high energy prices, which a rate hike cannot fix directly. Raising rates slows demand, but it does nothing about the supply side of the oil market.

The surging Treasury yields create a separate headache. Kevin Warsh, the Fed chair, is watching long-term yields climb even as he raises short-term rates, which means the bond market is doing some of the tightening for him but also signalling that investors expect inflation to stay high for longer. One month of data after a single rate hike is nowhere near enough to judge whether the policy is working. If inflation stays elevated and the housing market freezes up at the same time, the Fed faces the classic dilemma of stagflation, where prices are rising but growth is stalling, and there is no rate setting that solves both problems at once.