Asia Markets Reel as Oil Prices Soar to Near $110 per Barrel

The Asian markets opened with a sense of unease as oil prices continued to climb, reaching nearly $110 per barrel in New York. This has led to a significant increase in inflation expectations, with producer prices rising 0.4% in August, the strongest monthly increase since May.

As a result, the market is now pricing in a roughly 70% chance of a hike next week and a move by October is fully discounted. The US 10-year yield has reached its highest level since late 2023 at 4.97%, with Asia quickly following suit.

The bond market is reeling from the energy shock, with Australia's three-year yield jumping to 5.05%, the highest since 2011, and New Zealand's two-year yield climbing more than 20 basis points.

Traders are now forced to hedge against the possibility that the energy shock lasts long enough to become an inflation regime rather than another temporary spike. With oil prices expected to remain above $100 per barrel through year-end, waiting for each monthly inflation print to confirm what the screen is already telling you becomes a luxury.

The central bank problem is especially awkward because there is no clean policy answer. The Fed cannot cut the price of Brent by raising the funds rate, and the ECB cannot reopen shipping lanes by tightening financial conditions.