Asian stocks and bonds fell on Friday after another surge in oil prices, leaving global bond yields near cycle highs just hours before the August US CPI report that will shape the Federal Reserve’s September decision. Futures markets still price roughly a 70% chance the Fed raises rates later this month, a bet that has hardened as energy costs climb.
The selloff followed a rough Thursday in the US, where all three major indexes closed lower after US crude breached $100 a barrel for the first time in months. Brent crude futures jumped as much as 6% to a four-month high on Friday, driven by escalating US-Iran exchanges that have threatened shipping through the Strait of Hormuz, the chokepoint for roughly a fifth of the world’s oil.
Yields climb, stocks wobble
Benchmark government bond yields rose across Asia, extending a global rout that has picked up pace as traders abandoned hopes that central banks might look through the energy shock. The 10-year Treasury yield held near cycle highs, and European yields followed the same path. Higher yields feed directly into borrowing costs for mortgages, corporate debt and government financing, and analysts have warned the squeeze is already showing up in the housing market.
Equity investors showed little appetite for risk into the data. The S&P 500 closed at 7,591.70, down 0.58%, and the Dow lost 0.60% on Thursday. Asian markets tracked that weakness on Friday, with technology-heavy indexes falling hardest as rising yields compress the valuations of growth stocks.
The bond moves matter beyond trading desks. Two-year Treasury yields jumped immediately after Thursday’s stronger-than-expected PPI release, and the cumulative rise over recent weeks has repriced everything from corporate bond issuance calendars to mortgage applications. Banks in several countries have begun passing higher funding costs to borrowers, and economists at major houses have cut growth forecasts for the second half, citing energy and financing headwinds arriving together.
Currency markets add another layer. The dollar has firmed as rate expectations rose, pressuring Asian currencies and forcing several regional central banks to defend their currencies through intervention or rate support. A stronger dollar also tightens financial conditions globally, since much of the world’s dollar-denominated debt becomes more expensive to service as the currency climbs. The Japanese yen has been a focal point, strengthening sharply as carry trades unwind, a dynamic that can amplify selloffs when leveraged positions funded in yen get closed out.
What the CPI report decides
The August consumer price report lands at 8:30 a.m. ET on Friday, with economists expecting headline and core figures consistent with the elevated run of recent months. August PPI came in hot at 0.4% a day earlier, which pushed gold down more than 1% and lifted rate-hike odds. Fed officials have split publicly: Governor Christopher Waller said earlier this month he could support holding rates if inflation cooperates, while other policymakers have argued the war-driven energy shock demands a preemptive response.
The calculus is uncomfortable for the Fed. Hiking into an oil shock risks compounding a growth slowdown, but standing pat risks a repeat of 2022, when the central bank was criticized for treating an energy spike as transitory. The Bank for International Settlements has urged policymakers to look through supply shocks if they prove temporary, but markets are betting central bankers will not want to make the same mistake twice.
Europe already moved
The European Central Bank became the first major central bank to respond, raising its benchmark rate a quarter point to 2.25% this week. The Fed, Bank of England and Bank of Japan all decide in the coming days, and the ECB’s move raises the bar for any of them hoping to stay on hold. Bank of England Governor Andrew Bailey said the war has pushed up energy prices and that the effects are already visible at the petrol pump, with household bills set to rise later in the year if the spike persists.
President Donald Trump added to the uncertainty by suggesting the conflict could extend into next year, comments that traders read as removing the tail risk of a quick resolution that had briefly supported risk assets earlier this month. Oil market positioning has turned increasingly defensive, with traders paying up for options that protect against further spikes.
Emerging markets are caught in the middle. A stronger dollar and elevated crude prices strain import budgets across Asia and Latin America, and several central banks there have already paused easing cycles that were underway before the conflict escalated. The IMF has warned that a sustained energy spike would hit fiscal balances twice, through slower growth and through higher subsidy costs in energy-importing economies.
What to watch next
Friday’s CPI print is the last major data release before the Fed’s decision. A reading at or above expectations would likely push rate-hike odds above 70% and extend the bond selloff into next week. A softer print, by contrast, would revive the hold camp and could give beaten-down equities and crypto a bounce. September futures for the S&P 500 pointed lower through the Asian session, suggesting traders are positioning for the worse outcome.
Oil remains the wildcard. Diplomatic channels between Washington and Tehran stay open through intermediaries, and any sign of de-escalation would hit crude prices fast, unwinding much of the inflation fear that has driven this week’s market stress. Until then, expect yields to stay elevated and equity volatility to remain high.