Share markets have slipped in Asia as fresh fighting broke out between the United States and Iran, lifting oil prices, while bond yields stayed elevated after investors narrowed the odds on a US rate hike.
Brent futures climbed 1.4 per cent to $US89.38 ($A124.85) a barrel after US forces struck two of Iran’s launchers on its island of Larak on Sunday. In response, Iran was attacking US forces stationed in Jordan, Fox News said.
The resulting risk to inflation kept bond markets on edge after Federal Reserve Chair Kevin Warsh emphasised on Friday the central bank had work to do to control inflation.
Markets reacted by lifting the probability of a September rate increase to 57 per cent, shoving short-term Treasury yields sharply higher and flattening the curve.
“We continue to expect that a hike won’t come until December, though agree that the September meeting is live,” said Michael Feroli, chief US economist at JPMorgan.
“Moreover, regardless of the exact timing of hikes, Warsh’s speech suggested a chair more willing to translate his concern about inflation into a policy tightening.”
Key to the chance of an early hike will be the outcome of Friday’s August payrolls report and consumer price data due on September 11.
Analysts are forecasting a bounce of 58,000 in jobs, following July’s shock drop of 23,000, with unemployment holding at 4.1 per cent. It would probably need a much weaker outcome to greatly lessen the risk of a September rate move.
The inflation threat is expected to spur New Zealand’s central bank to hike rates for a second straight meeting on Wednesday, while the Bank of Canada is seen on hold, given the damage a trade war with the US could do to the economy.
Higher yields combined with geopolitical stress to push Japan’s Nikkei down 2.1 per cent on Monday, while South Korean stocks fell 2.4 per cent. MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.7 per cent.
In Europe, EUROSTOXX 50 futures dropped 0.5 per cent, while DAX futures eased 0.4 per cent. On Wall Street, S&P 500 futures dipped 0.3 per cent and Nasdaq futures shed 0.5 per cent.
Inflation and interest rates will be high on the menu when G20 finance ministers and central bankers meet in North Carolina on Monday and Tuesday.
In an interview with Reuters on Sunday, US Treasury Secretary Scott Bessent said he planned to meet the head of the Bank of Japan amid speculation that it, too, will raise interest rates in September.
Analysts argue a series of hikes are needed to shore up the yen, which again slid past 160.00 per dollar on Friday.
Asked about the yen, Bessent said the move was “pretty well contained”, suggesting the slide was not disorderly enough to trigger a repeat of joint Japan-US intervention.
The dollar was steady at 160.00 yen, still some way from the July top of 163.99.
Two-year Treasury yields held at 4.36 per cent, after jumping almost 12 basis points on Friday. Yields on 30-year bonds were more contained at 5.2080 per cent, with investors taking some comfort from Warsh’s emphasis on fighting inflation.
The euro was a shade firmer at $1.1591, having slipped 0.6 per cent on Friday after Warsh’s speech.
Data on EU inflation due this week is expected to cement market pricing for another hike from the European Central Bank when it meets on September 10.
In commodity markets, US crude rose 1.3 per cent to $US84.50 ($A118.03) a barrel. Gold was a fraction firmer at $US4,454 ($A6,221) an ounce, having shed 3.2 per cent on Friday as yields spiked.
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