Central Banks Signal Shift to Higher Neutral Rates as Oil and Yields Surge
Market Movements and Central Bank Responses
A look at the day ahead in European and global markets from Wayne Cole.
Asian and European Market Overview
It's been a bit of a random walk in Asia so far, with oil and yields up, stocks mixed, gold down and the dollar flat. Oddly, European share futures are firmer, while Asia and Wall Street futures have eased.
Oil Price Surge and Geopolitical Tensions
Brent has climbed around 2% after President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz, which seems to be a repeat of its previous demands.
Analysts, at least publicly, continue to assume both sides are seeking an off-ramp. Yet, Trump has repeatedly said the war will linger past the midterms and Tehran must be hoping the Republicans will lose control of one or both houses, piling pressure on the White House to end the conflict.
Reports more oil and refined products are getting out of the Gulf could also be encouraging Trump to hang on. Ship tracker Kpler estimates crude exports from key Middle East producers rebounded in September to 12.8 million barrels per day, the highest since the war started.
Impact on Energy Markets and Central Bank Policy
The lack of a truce, and the fading hope of one anytime soon, has seen Brent close above $100 for three weeks straight, leaving it up 17% for September so far. A dearth of refining also means diesel is at record highs, with the crack spread around $75 compared to the historical average of $15.
All of which makes it increasingly hard for central banks to "look through" the energy shock, a major reason Australia's central bank is expected to hike rates to a 15-year high on Tuesday.
Economic Growth and Interest Rate Expectations
At the same time, the AI boom and hot PMIs have seen forecasts for economic growth revised up for Asia, Europe and the United States. The Atlanta Fed GDPNow prediction is for third-quarter GDP to run at a racy 5.0%. It will be interesting if the ISM survey this week confirms the strength of the PMIs.
Fund futures have reacted by pricing in a 66% chance the Fed hikes in October and have 90 basis points of total tightening ahead. Notably, markets have priced out any chance of a cut until mid-2028, so it's no wonder 2-year yields are up 55 basis points this month alone.
Bond Yields and the Return of the Term Premium
The 30-year has climbed 25 basis points in September and most of that is in the term premium, essentially returning bonds to where they were before the 2008 global financial crisis. It's why central bankers everywhere are talking of a new, higher neutral rate, which seems much like the one from the 1990s.
Key Events to Watch
Key developments that could influence markets on Monday:
- Dallas Fed September manufacturing survey
- Fed speakers include Vice Chair for Supervision Michelle Bowman, Governor Lisa Cook, Richmond Fed President Thomas Barkin
- Appearance by ECB President Christine Lagarde, ECB board member Frank Elderson, ECB bank supervisor Pedro Machado
- Speeches by Bank of England Deputy Governor for Markets and Banking Dave Ramsden and Norway Central Bank Deputy Governors Pal Longva and Oystein Borsum
(Editing by Jamie Freed)