Friday, July 3, 2026

Macro Musings · Daily Briefing · Friday, July 3, 2026

Oil is flooding back through Hormuz and nobody remembered to want it

Brad Setser and others analyze how China's surging auto exports and industrial policy are inflicting significant damage on Germany's car industry through lost export markets, rising import competition, and third-party market share losses estimated at over 1% of German GDP.

Personal Stakes · Est. read time 5 min

In 30 seconds: Oil prices face bearish pressure as the reopened Strait of Hormuz floods the spot market with supply, JPMorgan warns of a coming supply wave, and Saudi Arabia struggles with a near-$100/barrel breakeven while its external balance sheet grows more leveraged. Brad Setser and others analyze how China's surging auto exports and industrial policy are inflicting significant damage on Germany's car industry through lost export markets, rising import competition, and third-party market share losses estimated at over 1% of German GDP. Bitcoin fell 31% and gold dropped 7% in H1 2026, marking an unprecedented underperformance for both assets, even as analysts note that institutional allocations to gold remain historically low at around 3% for family offices. Analysts warn the Fed turned hawkish in June just as inflation was declining, with Trump and Treasury officials publicly nudging the Fed toward dovishness, raising questions about central bank independence and whether a policy pivot is imminent when June CPI drops.

The Strait of Hormuz is open again, and the market is feeling the consequences. The surge of oil exported through the re-opened Strait of Hormuz has created a temporary oversupply in the spot market, and you can see it in the curve: Brent's six-month calendar spread has slumped into a small contango for the first time since October 2025 and before that December 2023. Now the same bank is decidedly bearish. A wave of oil is about to enter the market. The surge in oil supply is about to collide with a market that, at least for now, simply does not need it. Brent itself is barely treading water, up just $0.05 per barrel on the week. It would be the first positive week in a month for crude prices. Saudi Arabia borrowing pace: $100 billion a year. The Saudis' external balance sheet is becoming more levered over time, with borrowing running at roughly $100 billion a year, well in excess of their current account deficit. That borrowing has allowed the Saudis to keep adding to their external assets even with a current account deficit, which sounds clever until you remember the Saudis (like the rest of the GCC) face big post war investment needs. The east-west pipeline was critical to maintaining Saudi Arabia's external position: oil production and exports were only impacted by the war in March, representing just one of twelve months in the sample. On the demand side, a historic milestone is approaching in the US, where nat gas is about to overtake oil as the largest source of energy consumption. The US carries its own vulnerability here: the SPR has been depleted, leaving the country more exposed until it is refilled. Structuring the releases as exchanges or loans means the SPR should refill over the next few years.

China's active industrial policy — substituting imports with domestic production while building export scale — is reshaping the trade flows that German automakers depend on. China is heading toward 10 million passenger car exports this year, roughly 15% of all non-Chinese demand, with an estimated 15 million units of spare capacity sitting behind that. The damage runs through lost direct exports, import competition at home, and third-party market share losses — each adding its own drag on German GDP. Displacement in third-party markets adds further drag, with estimates suggesting China accounts for over half the total net export hit. Meanwhile the EU now runs a deficit with China even in HS 8407 (standard non-diesel combustion engines), and EU parts trade (excluding lithium-ion batteries) has now registered deficits.

Gold is the ancient hedge, the thing you own when you distrust everything modern. Bitcoin is the futuristic hedge, the thing you own when you distrust everything ancient. Both promise safety from the system. If your portfolio thesis was "I don't trust fiat currencies or central banks or governments, so I'll own the two assets that exist precisely to protect me from those things," you had a rough six months. Gold has at least started to claw back some ground. As of 2026-07-03, gold futures closed at $4,187.30, up 1.81% on the day. Whether that constitutes a trend reversal or a dead cat bounce in a shiny metal is left as an exercise for the reader. The institutional picture makes the drawdown more interesting, not less. Family offices currently allocate roughly 3% of their portfolios to gold. The logic would seem to run: you have almost no gold, you have enormous private market exposure, and the two assets you might have owned for protection both fell. The lesson, if there is one, is that hedges work until they don't, and then they stop working at the same time.

There is a growing sense that the Fed got its timing exactly wrong. The argument goes like this: the Fed turned hawkish in June right as inflation was falling apart, and risk assets were punished for a policy mistake, not a deteriorating economy. The economy itself was not the problem. The central bank was. The case rests on the data. Nowcast models show inflation rolling over decisively across core goods and services, not just energy. If that trajectory holds, the expectation is that when June CPI drops mid-July, the Fed pivots. That is the base case for the optimists. What makes this episode unusual is the chorus of voices from outside the building. The Treasury Secretary said he hoped the Fed would have an 'open mind' on inflation and predicted it would ease this year. The sequencing here is not subtle. If you were a central banker trying to maintain the appearance of independence, you might find this uncomfortable. The question is whether the public statements begin to influence market pricing or expectations of what the Fed will do, because that's what guidance does. The irony is that the data may bail everyone out. If inflation really is rolling over, the Fed can cut and claim it was always going to, the administration can claim credit, and nobody has to have the awkward conversation about who is actually setting monetary policy. The best resolutions to institutional crises are the ones where the crisis just stops mattering.

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