Markets eye higher neutral rate as oil, yields and growth forecasts rise
Reuters day-ahead report says Brent is up about 2%, yields are higher and markets are pricing no Fed cut until mid-2028. It also flags Dallas Fed manufacturing data and several central bank speeches later in the week.
Asian markets have been moving in a mixed pattern, with oil and yields higher, stocks uneven, gold lower and the dollar little changed. European share futures are firmer, while Asia and Wall Street futures have eased. Brent has risen around 2% after President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz, repeating previous demands. Analysts publicly still assume both sides are seeking an off-ramp.
Trump has repeatedly said the war will continue past the midterms, and Tehran is hoping Republicans lose control of one or both houses to increase pressure on the White House to end the conflict. Reports that more oil and refined products are leaving the Gulf could also be helping Trump hold his position. 8 million barrels per day, the highest since the war started. The lack of a truce and fading hope of one any time soon have kept Brent above $100 for three straight weeks, leaving it up 17% so far in September.
A shortage of refining capacity has also pushed diesel to record highs, with the crack spread around $75 versus a historical average of $15. That combination is making it harder for central banks to look through the energy shock, a key reason Australia's central bank is expected to lift rates to a 15-year high on Tuesday. At the same time, the AI boom and firm PMIs have led to higher growth forecasts for Asia, Europe and the United States. 0%.
The ISM survey due this week will be watched for confirmation of the PMI strength. Fund futures are pricing a 66% chance of a Fed hike in October and 90 basis points of total tightening ahead. Markets have also priced out any chance of a cut until mid-2028, helping push 2-year yields up 55 basis points this month. The 30-year has risen 25 basis points in September, with most of the move in the term premium, bringing bonds back to where they were.
Before the 2008 global financial crisis, central bankers were already weighing the idea of a higher neutral rate, which now looks similar to the level seen in the 1990s. Key events that may influence markets on Monday include the Dallas Fed September manufacturing survey. Fed speakers scheduled for Monday include Vice Chair for Supervision Michelle Bowman, Governor Lisa Cook and Richmond Fed President Thomas Barkin. Also due are appearances by ECB President Christine Lagarde, ECB board member Frank Elderson and ECB bank supervisor Pedro Machado.
Speeches are also set from Bank of England Deputy Governor for Markets and Banking Dave Ramsden, plus Norway central bank Deputy Governors Pal Longva and Oystein Borsum.