Capital Economics has warned that the spread between 10-year and 2-year US Treasury yields will narrow further in the coming months and that escalating tensions in the Strait of Hormuz could lead to a complete yield curve inversion. The firm forecasts the Federal Reserve will raise interest rates by 75 basis points over the next year — nearly double the 40 basis points currently priced by markets — making Capital Economics one of the most hawkish institutional forecasters in the current rate cycle. The yield curve flattening is already underway: the 10-year Treasury yield rose to 4.59% on Monday while the 2-year yield has been driven higher by rising rate hike expectations, compressing the spread between the two.Why the Curve Is Flattening — Short-Term Real Rates Rising FasterCapital Economics identifies the specific mechanism driving the flattening: short-term real rate expectations have risen more than long-term real rate expectations. "One reason for this divergence is that short-term real rate expectations have risen more than long-term real rate expectations, likely in response to strong economic data," the firm stated. This pattern is consistent with the current data environment — June nonfarm payrolls at 57,000 were soft, but the unemployment rate has continued to fall, consumer inflation expectations per the NY Fed reached 3.7% in July, and Brent crude at $82-85 is adding energy-driven inflation pressure that feeds directly into short-term CPI expectations.When short-term real rates rise faster than long-term rates, the yield curve flattens — the 2-year yield rises toward the 10-year yield, compressing the spread. A complete inversion — where the 2-year yields more than the 10-year — has historically been one of the most reliable leading indicators of recession in the US economy, having preceded every recession since the 1970s with a lead time of 6-18 months.The Hormuz Channel — How Oil Feeds Into Curve InversionCapital Economics explicitly links Strait of Hormuz escalation to the potential for complete yield curve inversion — a connection that runs through the inflation channel rather than the growth channel. Hormuz shipping at a three-week low of eight transits per day, Brent crude at $82-85 from a pre-conflict level of approximately $65, and the SPR at its lowest since 1983 reducing the government's ability to buffer supply shocks — all of these feed directly into the near-term inflation expectations that drive 2-year yields higher.The 10-year yield is more anchored by long-term growth and inflation expectations — expectations that incorporate the possibility of a recession slowing inflation over the medium term — while the 2-year yield reflects the market's pricing of Fed policy over the next two years. If Hormuz escalation keeps oil elevated and short-term inflation high, the Fed is forced to keep rates higher for longer, pushing the 2-year yield up. If that same oil shock simultaneously slows economic growth — the stagflation scenario — the 10-year yield stays contained as the market prices in eventual Fed cuts. The spread between the two compresses toward zero and potentially inverts.75 Basis Points vs 40 Basis Points — The Market Underpricing RiskCapital Economics' forecast of 75 basis points in Fed rate hikes over the next year against the market's current 40 basis points pricing represents a 35 basis point divergence that is significant for asset allocation. If Capital Economics is correct, the market is currently underpricing the Fed's tightening trajectory by nearly double — which means risk assets including Bitcoin are being priced with insufficient rate hike risk embedded in their valuations.The 75 basis point forecast is consistent with the current data picture Capital Economics is working from: September rate hike odds at 63% per CME FedWatch imply one 25 basis point hike with moderate probability. Capital Economics is projecting three 25 basis point hikes — September, November, and potentially January — in a scenario where Hormuz-driven energy inflation keeps headline CPI elevated through H2 2026 despite the labor market softening that the June payrolls miss had signaled.The Bitcoin Implications — Three Compounding HeadwindsA yield curve inversion driven by Hormuz-escalation-induced rate hikes would represent the most challenging single macro configuration for Bitcoin since the current correction began. Three headwinds compound simultaneously in that scenario. First, higher short-term rates increase the opportunity cost of holding non-yielding Bitcoin — the same mechanism that drove $4.06 billion in June ETF outflows when the 2-year yield was already elevated. Second, yield curve inversion historically signals recession risk — and recession fears produce broad risk-off de-risking that reduces institutional appetite for volatile assets like Bitcoin. Third, the Fed hiking 75 basis points against a backdrop of yield curve inversion and Hormuz-driven stagflation is the precise scenario in which the macro permission signal that Bitcoin's recovery thesis requires — a dovish FOMC — becomes most unlikely to arrive.The FOMC meeting on July 28-29 is now the most consequential scheduled event not just for Bitcoin's near-term price direction but for determining whether Capital Economics' 75 basis point forecast begins to be validated or is pushed back by a more data-dependent Fed communication.

New Zealand's annual inflation accelerated to 4.1% in the second quarter, its highest level in more than two years, as fuel prices surged, according to Bloomberg. The increase supports the Reserve Bank of New Zealand's decision to begin raising interest rates.

According to CNBC, JPMorgan Chase CEO Jamie Dimon said investors are underestimating risks to the global economy and that he would not buy equities or long-dated U.S. Treasurys at current prices. In an hourlong interview released late Monday, Dimon said markets are not fully pricing in geopolitical and fiscal threats, including the wars in Ukraine and the Middle East, tensions between the U.S. and China, and rising military spending alongside widening government deficits. Dimon said it is difficult to know exactly what risks are already reflected in asset prices, but added that what is not priced in is what actually happens. He said the global economy has become more resilient because it is less dependent on energy than in previous decades, but warned that this does not rule out a sudden turning point. Dimon also said persistent U.S. budget deficits will eventually become a problem and could push interest rates higher as bond investors demand more compensation to finance government debt. Asked about Treasurys, Dimon said he would not personally buy long-dated bonds and said the 10-year Treasury yield should probably be at 4% to 4.5% even if inflation returns to the Federal Reserve's 2% target. He was similarly cautious on stocks, saying he would consider an individual stock only if it were a great investment, but would not buy the broader market at current valuations. On artificial intelligence, Dimon compared the current spending boom to the early internet era and said the money being spent is likely to pay off over time, though not on the timetable investors expect.

British Prime Minister Andy Burnham has named Kanishka Narayan as minister for artificial intelligence and elevated the post to a cabinet-attending role for the first time, according to Bloomberg. The appointment gives the AI brief a seat at cabinet as the new government signals a higher priority for the sector.

According to CNBC, U.S. stock futures were little changed Monday evening, with S&P 500 futures down 0.1% and Nasdaq 100 futures off 0.2% after oil prices rose and investors looked ahead to a busy week of corporate earnings. In regular trading, the Dow Jones Industrial Average fell 307.16 points, or 0.59%, the S&P 500 lost 0.19% and the Nasdaq Composite declined 0.05%. U.S. crude futures closed up 0.9% at $83.23 a barrel and Brent settled 1.3% higher at $89.22 after President Donald Trump said in a Truth Social post that Tehran will pay for the deaths of three U.S. service members. Traders will watch upcoming results from Alphabet, IBM and Tesla, while General Motors and 3M are due Tuesday morning and Chubb is set to report after the close.

According to CNBC, Jim Cramer said Monday that Netflix's steep decline has made the streaming company worth another look, but he urged investors to buy only a small position and add gradually on weakness. He said Netflix shares have fallen about 44% over the past year, including another 10% drop after last week's earnings report, as the company missed second-quarter revenue expectations and cut its outlook for full-year revenue growth to 13% to 14% from 16.5% in 2025. Cramer said the quarter was disappointing, the content slate was weaker than usual, and Netflix no longer has the same competitive advantages it once had in streaming. He also said the company's plan to reduce disclosures and move its What We Watched engagement report to an annual release unsettled Wall Street, after it already stopped reporting quarterly membership numbers last year. Despite those concerns, Cramer said Netflix now trades at about 19 times this year's earnings estimates, its cheapest valuation since 2022, and noted that the company bought back $4.7 billion of stock in the second quarter and still has roughly $27 billion remaining under its authorization.

US Strategic Petroleum Reserve crude oil inventories fell by approximately 5.1 million barrels last week to 311.4 million barrels — the lowest level since 1983, according to Jin10. The drawdown arrives as Brent crude is already trading near $82-85 per barrel following five consecutive days of US strikes on Iran and Hormuz shipping transits at a three-week low of eight ships per day.

Spot gold fell below $4,000 an ounce, down 0.22% on the day. According to Jin10,

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