Tensions and Inflation Send Markets into a Tizzy

Global markets were caught between two opposing forces last week: a warning from Federal Reserve Chair about underlying inflation and the potential for further tightening, and a fresh escalation in the Gulf region that sent crude oil prices sharply higher.

The combination pushed Treasury yields higher early in the week, with 60 percent odds of a September rate hike rising. However, after Governor Waller's call for patience and softer labor data, yields pulled back, allowing equities to recover.

Central banks elsewhere were tightening or leaning towards tighter monetary policy, with the RBNZ hiking rates to 2.75 percent, the BoC warning that tariffs and oil prices could force its hand, and eurozone inflation jumping to a 2026 high of 3.3 percent.

The ECB is now all but certain to hike by 25bps next week, with markets shifting focus on whether it will signal more or frame it as an insurance measure against the energy shock.