Market Developments
Oil was the week’s dominant story. Brent crude rose more than 11% to touch $107.63/bbl on Thursday, its highest level since May, as the US-Iran conflict escalated from strikes on launch sites to attacks on shipping and Gulf energy infrastructure: Houthi strikes hit Saudi Aramco facilities, US forces struck Iranian-linked tankers, and transit through the Strait of Hormuz fell to below 2 million barrels a day from roughly 8 million before the escalation, while OPEC+ left October output unchanged. The shock fed directly into inflation and rate expectations: August producer prices rose 0.4% on the month as a 4.2% jump in energy costs lifted the annual rate to 5.4%, and Friday’s CPI showed headline inflation steady at 3.4% year on year but a firmer than expected 0.3% monthly core print, the fastest pace since April. Markets responded by pushing the implied probability of a 25bp Fed hike at next week’s FOMC meeting to nearly 90%, up from around 70% before the release. The 10-year Treasury yield rose 19bp on the week to 4.97% and the 2-year extended its climb past 4.6%, while the S&P 500 fell 0.8% and the Dow 1.6%.
Globally, performance was mixed. The Stoxx 600 dropped 1.7% as the ECB raised its deposit rate a further 25bp to 2.50% in a unanimous decision, with the energy shock adding to inflation pressure already facing the region. Asian markets diverged: the Hang Seng fell 3.3% and the Sensex fell 2.3% on oil-driven inflation and rate concerns, while the Nikkei held up better as a stronger yen and BoJ tightening expectations offset the energy shock.
