U.S. Treasury yields rose on Tuesday while oil prices extended their sharp rally and gold recovered modestly, as investors positioned for a potentially more hawkish Federal Reserve amid escalating geopolitical tensions in the Middle East.

President Donald Trump’s proposal to impose shipping fees on vessels transiting the Strait of Hormuz and reinstate a blockade of Iranian ports has reignited concerns about energy-driven inflation, prompting markets to reassess the outlook for U.S. monetary policy.

The developments come at a pivotal moment for financial markets, with investors awaiting June inflation data and Federal Reserve Chair Kevin Warsh’s first congressional testimony since taking office. Together, the events could shape expectations for the Fed’s policy path through the remainder of 2026.

U.S. Treasury yields moved higher across the curve in early trading, extending Monday’s selloff in government bonds as investors priced in a greater probability that persistent inflation could force the Fed to tighten policy further.

The benchmark 10-year Treasury yield rose more than one basis point to 4.63%, while the policy-sensitive two-year yield climbed above 4.29%. The 30-year Treasury yield also advanced to around 5.11%.

The move follows a sharp repricing on Monday, when the two-year yield surged more than six basis points, and the 10-year yield gained four basis points after Trump unveiled plans to impose a 20% shipping fee on cargo passing through the Strait of Hormuz and ordered the reinstatement of a U.S. blockade of Iranian ports.

The measures represent one of the most significant escalations in U.S. economic pressure on Iran since the conflict began earlier this year and have amplified fears of prolonged disruptions to global energy markets.

Crude prices continued climbing after Monday’s surge, escalating concerns that higher energy costs could reignite inflation just as price pressures were beginning to moderate.

U.S. West Texas Intermediate crude rose nearly 3% to around $80.35 per barrel, while Brent crude climbed close to 4% to approximately $86.50, building on Monday’s gains of almost 10%.

The Strait of Hormuz remains the world’s most important oil transit chokepoint. Before the outbreak of the U.S.-Iran conflict in late February, roughly one-fifth of global crude supplies passed through the waterway. Shipping volumes subsequently fell after Iran began targeting commercial vessels, although traffic had shown signs of recovering following an interim agreement between Washington and Tehran.

Trump’s latest announcement has renewed fears that supply disruptions could persist for an extended period.

Citigroup warned that the proposed shipping fees materially increase the risk of further military escalation and could delay any meaningful diplomatic breakthrough with Tehran.

“The possibility that the Iranian regime walks away from the memorandum of understanding until after the U.S. midterm elections has also risen, a scenario which would most likely see higher-for-longer oil prices,” the bank said.

Markets Shift Toward Additional Fed Tightening

The renewed inflation threat is rapidly changing interest rate expectations. According to CME FedWatch data, traders now assign roughly a 42% probability of a rate increase at the Federal Reserve’s July meeting, up sharply from about 27% a week earlier. Markets are also increasingly pricing in another rate increase by next April.

Fed Governor Christopher Waller reinforced the hawkish narrative on Monday, saying policymakers may need to raise interest rates “in the near term” if incoming data continue showing inflation remaining well above the central bank’s 2% target. Markets are now pricing approximately a 75% probability of a September rate hike, illustrating how quickly expectations have shifted following the latest energy shock.

The changing outlook reflects growing concern that rising oil prices could spill over into transportation, manufacturing, and consumer goods, delaying progress toward the Fed’s inflation objective.

Investor attention now turns to two critical catalysts. The Labor Department is expected to report that annual consumer inflation eased to 3.8% in June from 4.2% in May, although core inflation, which excludes food and energy, is forecast to remain unchanged at 2.9%.

Markets will closely scrutinize whether the recent surge in energy prices has begun filtering into broader inflation measures or whether underlying price pressures continue to moderate.

Equally important will be Federal Reserve Chair Kevin Warsh’s first semiannual testimony before Congress. Warsh is scheduled to appear before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday.

His testimony is expected to provide the clearest indication yet of how the new Fed leadership intends to respond to mounting geopolitical risks and renewed inflationary pressures. Any suggestion that policymakers are becoming more concerned about energy-driven inflation could further strengthen expectations for additional interest rate increases.

Gold Attempts to Stabilize

Gold edged higher after suffering its steepest one-day decline in more than a month.

Spot gold rose about 0.5% to roughly $4,020 an ounce after earlier falling to a two-week low, while U.S. gold futures posted similar gains. The rebound was helped by a modest pullback in the U.S. dollar, with the Dollar Index easing about 0.2%, making bullion more affordable for holders of other currencies.

However, analysts cautioned that gold’s recovery could prove short-lived if inflation surprises to the upside.

“A CPI reading above the region of 3.8% could reinforce expectations of a hawkish Federal Reserve and create a headwind for gold prices,” said Ricardo Evangelista, senior analyst at ActivTrades.

Unlike interest-bearing assets, gold generates no yield, making it less attractive when investors anticipate higher interest rates.

Monday’s nearly 3% decline illustrated how quickly inflation expectations can outweigh gold’s traditional role as a geopolitical safe haven. Normally, escalating geopolitical tensions boost demand for bullion, but when those tensions simultaneously fuel expectations of tighter monetary policy and higher real interest rates, gold can come under pressure.

China’s trade growth accelerated sharply in June, as the global artificial intelligence investment boom and a rush to beat looming U.S. tariffs power the country’s export engine even as its domestic economy continues to struggle with weak consumption, falling investment and a prolonged property downturn.

Exports posted their strongest growth in nearly four years, driven by soaring shipments of semiconductors, AI-related hardware, electric vehicles and ships, highlighting China’s central role in supplying the infrastructure behind the global AI race. The latest figures also bolster a widening imbalance in the world’s second-largest economy, where manufacturing and exports remain resilient while household spending and private-sector confidence remain subdued.

The robust trade data come just one day before China releases second-quarter gross domestic product figures, which are expected to show economic growth slowing from the previous quarter despite the export boom.

China’s exports rose 27% year-on-year in June in U.S. dollar terms, customs data released Tuesday showed, accelerating from a 19.4% increase in May and comfortably exceeding economists’ expectations for an 18.2% gain. It was the fastest pace of export growth since October 2021, according to Reuters.

Imports also surprised to the upside, climbing 36% from a year earlier after increasing 27.4% in May. Economists had expected imports to rise around 24%. The stronger-than-expected performance left China with a trade surplus of $125.6 billion for the month.

AI Supply Chain Drives Export Engine

The standout feature of June’s trade data was the dominance of AI-related manufacturing.

Semiconductors ranked among China’s fastest-growing export categories during the first half of the year, alongside rare earth products, automobiles, and ships. Those sectors have benefited directly from unprecedented global investment in artificial intelligence infrastructure, as technology companies continue spending heavily on servers, data centers and advanced computing equipment.

The surge indicates that China’s industrial sector has become deeply integrated into the global AI supply chain. Although the United States continues to restrict exports of its most advanced semiconductor technologies to China, Chinese manufacturers remain major suppliers of components, electronics, industrial equipment and critical minerals used throughout the AI ecosystem.

The export boom also reflects robust overseas demand extending beyond AI hardware, including electric vehicles, batteries and industrial machinery, sectors where Chinese manufacturers have significantly expanded global market share.

By contrast, more traditional labor-intensive exports such as toys, footwear, furniture, and steel continued to lag, reflecting structural shifts in China’s manufacturing economy toward higher-value industrial production.

Exporters Race Ahead Of New U.S. Tariffs

Another major driver behind June’s trade strength was a wave of front-loading by exporters seeking to beat anticipated U.S. tariff increases.

Factory activity accelerated during June as manufacturers rushed shipments before additional duties linked to President Donald Trump’s Section 301 trade investigations potentially take effect. The current 10% broad-based tariff is scheduled to expire on July 24, creating strong incentives for exporters and importers to move goods ahead of any policy changes.

According to China Beige Book, orders destined for the U.S. increased sharply during the month, contributing to higher factory output and pushing freight rates higher.

The strategy appears to be paying off. China’s exports to the United States rose approximately 14% in June, while imports from the U.S. climbed 26%, according to CNBC calculations based on official customs data.

More significantly, China has now returned to positive export growth to the United States during the first half of 2026 after experiencing double-digit declines through much of last year, suggesting bilateral trade has proven more resilient than many analysts expected.

Despite the impressive trade figures, the composition of China’s imports points to an economy that remains heavily dependent on external demand.

Much like exports, import growth was concentrated in high-technology products, while purchases across many consumer-oriented sectors remained subdued, indicating that domestic demand continues to lag.

Beijing continues to face a deepening supply-demand imbalance.

Industrial production has remained relatively strong thanks to manufacturing exports and AI-related investment, but household consumption has struggled to recover amid falling property prices, weak wage growth and subdued consumer confidence.

Private-sector investment also remains under pressure as developers continue dealing with the fallout from the country’s prolonged real estate downturn.

Against that backdrop, economists believe that China’s export strength is masking underlying weaknesses rather than signaling a broad-based economic recovery.

Goldman Sachs recently noted that while exports continue supporting headline growth, the benefits have not translated into stronger employment, higher corporate profitability, or significantly improved domestic demand.

Europe Emerges As Next Trade Battleground

The strength of China’s exports may also intensify trade tensions with key economic partners. Exports to the European Union rose 18.5% in June, while shipments to the Association of Southeast Asian Nations (ASEAN) surged 35%, highlighting China’s continued expansion into markets beyond the United States.

Imports from those regions also strengthened, rising 9% and 27%, respectively.

However, the growing trade imbalance with Europe has become an increasing source of political friction. Last month, Beijing and Brussels established a new trade and investment consultation mechanism aimed at addressing concerns over industrial overcapacity and market access. European officials have said they hope to achieve tangible progress by October.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said exports are likely to remain robust during the second half of the year, but warned that sustained strength could provoke additional trade measures from Europe and other major economies.

Russia Sanctions Add Uncertainty as Oil Imports Fall to Decade Low

Another emerging risk stems from proposed U.S. sanctions targeting buyers of Russian energy. Legislation originally introduced by the late Senator Lindsey Graham proposed imposing secondary tariffs of up to 500% on imports from countries purchasing Russian oil and natural gas. While the proposal remains under consideration, China, as Russia’s largest crude oil customer, would be particularly exposed if such measures were implemented.

“These factors could potentially throw a wrench in the excellent export performance so far,” said Lynn Song, chief economist for Greater China at ING.

One of the more surprising aspects of the June trade report was a sharp decline in crude oil imports. China imported just 29.3 million tons of crude during the month, down 41% from a year earlier and reportedly the lowest monthly volume in nearly a decade.

For the first half of 2026, crude import volumes fell 11% compared with the same period last year. The decline comes even as global oil prices remain elevated following the conflict in the Middle East and renewed supply concerns surrounding the Strait of Hormuz.

Julian Evans-Pritchard, head of China economics at Capital Economics, said the weakness likely reflects inventory drawdowns rather than collapsing energy demand. The explanation is consistent with China’s efforts to manage existing strategic and commercial stockpiles after building inventories during periods of lower oil prices.

Attention now turns to Wednesday’s release of second-quarter GDP data, which will provide the clearest picture yet of China’s broader economic health.

Economists surveyed by Reuters expect annual GDP growth to slow to 4.5% in the April-June quarter from 5% in the first quarter.

Additional data due Wednesday are also expected to paint a mixed picture. Industrial production is forecast to expand 4.7%, reflecting continued manufacturing resilience, while retail sales are projected to contract 0.1%, underscoring persistent weakness in consumer spending. Fixed-asset investment is expected to decline 4.9% during the first half of the year, worsening from a 4.1% fall during the first five months.

Investors are also closely watching a Politburo meeting expected later this month for signs of additional policy support.

Most economists believe Beijing is unlikely to unveil aggressive stimulus unless growth deteriorates more sharply. Policymakers remain reluctant to repeat large-scale stimulus measures, instead focusing on targeted fiscal support while attempting to curb excess industrial capacity and combat persistent deflationary pressures.