U.S. stocks moved lower Tuesday as investor optimism surrounding a potential reopening of the Strait of Hormuz weakened, adding pressure to a market already dealing with uncertainty over the broader conflict between the United States and Iran.

The S&P 500 traded down 0.1%, while the Nasdaq Composite declined 0.4%. The Dow Jones Industrial Average fell 42 points, or 0.1%.

The decline came as oil prices moved higher amid renewed uncertainty surrounding the Middle East.

U.S. West Texas Intermediate crude futures rose about 1% to above $83 per barrel, while international benchmark Brent crude gained roughly 1% to above $88.

The renewed strength in energy prices is becoming an increasingly important issue for investors because higher oil costs could complicate the Federal Reserve’s efforts to balance inflation against a weakening labor market.

Strait of Hormuz Uncertainty Returns to the Forefront

Investor sentiment had improved in recent sessions on expectations that negotiations could lead to the reopening of the Strait of Hormuz.

Those hopes have now weakened.

Iran’s Supreme National Security Council reiterated that the strategic waterway would not reopen until Tehran’s conditions are met. Iranian Foreign Minister Abbas Araghchi also previously said there was no possibility of restarting negotiations while the United States continued to violate the June memorandum of understanding and failed to compensate Iran for those violations, according to the semi-official Tasnim News Agency.

The uncertainty is particularly important for energy markets because the Strait of Hormuz is a critical route for global oil shipments.

Any prolonged restrictions could keep crude prices elevated and increase costs for businesses and consumers, potentially complicating the outlook for inflation and monetary policy.

Inflation Data Becomes the Next Major Catalyst

With geopolitical developments once again weighing on markets, investors are shifting their attention toward economic data.

The July consumer price index is scheduled for release Wednesday, followed by the producer price index on Thursday.

The reports could be particularly important after last week’s unexpectedly weak employment data raised concerns about the strength of the U.S. economy.

July nonfarm payrolls unexpectedly declined, creating a difficult policy environment for the Federal Reserve. A weakening labor market could support the case for keeping interest rates steady or eventually easing policy.

However, rising energy prices could work in the opposite direction by creating renewed inflationary pressure.

Fed Faces a More Complicated Policy Picture

The combination of weaker employment and higher oil prices creates a challenging environment for policymakers.

If inflation continues to moderate, investors could gain greater confidence that the Federal Reserve can keep interest rates unchanged despite elevated energy prices.

Dennis Follmer, chief investment officer at Montis Financial, expects the CPI report to continue its downward trend, which he believes would strengthen the case for the Federal Reserve to hold rates steady rather than raise them.

Services inflation remains a potential concern, but Follmer argued that the sector is less sensitive to interest rates and therefore may not materially undermine the case for maintaining the current policy stance.

What Investors Should Watch Next

The market’s near-term direction could depend on whether economic data or geopolitical developments take control of the narrative.

A softer-than-expected CPI reading could ease concerns about inflation and reinforce expectations that the Federal Reserve will avoid raising rates. At the same time, signs of continued weakness in employment could strengthen expectations that monetary policy eventually becomes more supportive of economic growth.

Conversely, a stronger inflation reading combined with crude oil remaining elevated could create a more difficult backdrop for stocks and bonds.

For now, the S&P 500 remains caught between hopes for easing geopolitical tensions and renewed concerns that the Iran situation could keep energy prices elevated. With CPI and PPI data arriving this week, investors are likely to receive a clearer indication of whether inflation or economic weakness will be the more important force shaping markets.