U.S. forces struck two Iranian rocket launchers on Larak Island near the Strait of Hormuz on Sunday, preventing an attempted deployment of sea mines into the critical shipping lane. The action ended roughly a month of relative calm following earlier hostilities and was the first known U.S. military strike in the region since late July. Oil prices responded immediately, with Brent crude rising above $90 a barrel in Monday morning trading, a gain of more than 1.5% at the open. The Strait, which before the conflict handled roughly a fifth of the world's energy exports, has seen sharply reduced shipping traffic throughout the standoff.
Layered on top of the geopolitical shock is the market repricing set off by Fed Chair Kevin Warsh's speech at Jackson Hole on Friday. Warsh disclosed that PCE inflation is running at 3.7% over the past year and at a 4.1% annualized pace over the past six months, and said those readings do not tell him that underlying trends have meaningfully improved. By Monday morning, fed funds futures placed a 60.4% probability on a quarter-point hike at the September 15-16 FOMC meeting, up from roughly 35% before Warsh spoke, according to the CME FedWatch tool. The policy-sensitive two-year Treasury yield had risen as much as 9 basis points on Friday.
Analysts described Warsh's speech as the closest he has come to acknowledging that rate hikes may be needed. JPMorgan Asset Management called it a hawkish speech and a clean-up act following the July meeting, which had left markets uncertain about the Fed's direction. Warsh also said he would be hard pressed to describe broad financial conditions as restrictive, pointing to tight credit spreads, strong corporate debt issuance, and relatively easy bank lending standards. The remarks put the Fed more squarely at odds with the White House's preference for lower rates.
The September 15-16 FOMC meeting is now set to be the most consequential policy decision of the year for borrowers. The government's next PCE price report, due to be released just days before the meeting, could prove decisive. For businesses carrying floating-rate debt or planning near-term capital investment, the cost of waiting for clarity has risen sharply.
China's National Bureau of Statistics reported an official August manufacturing PMI of 49.8, above the Reuters consensus of 49.6 but still below the 50-point expansion threshold for a second consecutive month. China's economy has slowed to its weakest quarterly growth since late 2022, held back by soft domestic demand and a prolonged property slump, limiting the tailwind that Asian export demand had provided to global supply chains earlier in the year.
Government bond yields remained elevated heading into the final week of August, with the U.S. 10-year at 4.73%, the U.K. above 5.15%, and Australia above 5.09%, according to a Monday markets analysis. The Fed and Bank of England each hold benchmark rates at 3.75%, well below market yields, and traders have shifted from pricing central bank rate cuts to pricing potential hikes in the coming months. For businesses refinancing debt or locking in commercial real estate terms, long-end borrowing costs are already near their highest levels since before the 2008 financial crisis.
U.S. Central Command confirmed Sunday that forces struck two Iranian rocket launchers on Larak Island after observing IRGC forces preparing to deploy sea mines into the Strait of Hormuz. Kharg Island, which handles roughly 90% of Iran's oil exports, was also reportedly targeted. Shipping through the strait, which once carried about a fifth of the world's energy exports, has declined sharply since the conflict began, with the latest strikes ending the month-long pause in hostilities that had allowed some calm to return to energy markets.
Markets saw elevated commodity prices and high sovereign yields throughout August, driven by ongoing Middle East conflict, pressure on inflation expectations, and hawkish central bank rhetoric. Despite the commodity pressure, equities trended higher during the month on the back of a solid earnings season. Gold and silver pulled back sharply on Monday morning, a signal that some investors are rotating out of haven assets, even as oil extended its gains.
A federal court ruling late last Thursday that the Pentagon's supply-chain-risk designation of Anthropic was unconstitutional continued to reverberate Monday, with a related case in Washington still pending. U.S. District Judge Rita Lin found that the Department of Defense designation constituted unlawful First Amendment retaliation and denied Anthropic due process under the Fifth Amendment. The ruling clears a major hurdle for Anthropic's anticipated IPO and sets a precedent that federal agencies cannot use supply-chain labels to punish AI companies for their safety policies.
Huawei Technologies submitted a formal bid to build advanced AI data centers in Egypt for government sectors including defense and public surveillance, according to a Monday AI regulatory briefing. The U.S. State Department responded by mobilizing Nvidia, AMD, and Microsoft to construct a competing bid while using export licensing controls and warnings about banned Huawei hardware. The episode illustrates how the U.S.-China competition for AI infrastructure influence is expanding well beyond both countries' borders.
Fed Chair Warsh's Jackson Hole debut was described by analysts on Monday as his most explicit acknowledgment that rate increases may be necessary, with futures markets lifting the September hike probability to 60.4%. Warsh said he would be hard pressed to describe financial conditions as restrictive and warned against a hall-of-mirrors dynamic in which the Fed relies on market prices while markets rely on Fed guidance. The government's next PCE report, due days before the September 15-16 meeting, and the August jobs report this Friday will together likely determine whether the Fed acts.
The EU AI Act's Article 50 transparency obligations, which took effect August 2, now require disclosure when users interact with AI systems, machine-readable marking of synthetic content, and deepfake disclosure, with penalties up to 15 million euros or 3% of global annual turnover. California's AI Transparency Act began requiring generative AI providers to offer watermarking and detection tools on the same date. At the federal level in the United States, no AI regulation bills have passed in the current session, though 85 new AI-related laws have been enacted across 27 states so far in 2026.
Bank of America's Small Business Checkpoint for August found that small business hiring was up 21% year-over-year in July based on payments data, and that profitability growth reached its strongest level of 2026, with the biggest gains in transportation and manufacturing. The strength coincides with NFIB data showing hiring plans at their highest since 2022. However, the average interest rate on short-maturity small business loans held at 7.9% in July, and any September Fed rate hike would translate directly into higher borrowing costs within weeks.
The return of Brent crude above $90 a barrel on Monday morning will rapidly feed into diesel prices and freight rates, squeezing margins for small businesses that depend on delivery, logistics, or energy-intensive production. Supply chain disruptions tied to reduced Strait of Hormuz traffic have already increased lead times and inventory costs for businesses that source goods from the Middle East or Asia. With inflation still running at 3.7% and energy prices re-accelerating, operators who had not already locked in fuel contracts or adjusted pricing will face renewed pressure.
The combination of a 60.4% market-implied probability of a September Fed rate hike and Brent crude back above $90 means the two largest variable cost categories for most small and mid-sized businesses u2014 credit and fuel u2014 are moving against operators at the same time. Any floating-rate lines of credit, equipment loans, or commercial mortgages should be reviewed now. Businesses that can convert variable-rate exposure to fixed-rate before the September 15-16 FOMC meeting should model the cost of doing so against the cost of absorbing a 25-basis-point increase. The Fed's next decision is not certain, but the odds now favor action.
On energy and supply chains, operators who have not priced renewed fuel cost increases into Q4 budgets and customer quotes should do so this week. The Strait of Hormuz disruption has already thinned shipping capacity and extended lead times on goods moving through the Persian Gulf corridor. If your supply chain touches that region, check with freight partners today on current rates and availability. For businesses planning to quote projects or lock in vendor contracts, the prudent move is to build in an energy cost buffer rather than assume prices retreat quickly.