Brent slipped back toward $104/bbl after briefly pushing close to $110/bbl, easing some of the immediate heat from the inflation trade. The move looks less like Washington suddenly waving an olive branch and more like the market shaving off some catastrophe premium after reports that Gulf foreign ministers are preparing to meet Iranian officials in Salalah, Oman, to carve out a temporary arrangement for shipping through the Strait of Hormuz.
Regional states hope a temporary shipping agreement between Iran and Oman can offer a pathway to ease hostilities and eventually reopen the Strait, and for a market starved of anything resembling diplomatic progress, hope springs eternal. With crude still sharply higher on the week and Middle East supply risks far from resolved, this remains relief rather than resolution, but at this stage even a modest thaw is enough to take some fear out of the price.
Oil Blinks
Markets finally found a little oxygen during the European session, but nobody should confuse a quieter screen with the fire being out.
US equity futures pushed higher, Treasuries caught a bid, and European stocks opened firmer as oil backed away from the extremes that had spent most of the week tightening the financial conditions screw. After several sessions in which crude, yields and inflation expectations seemed to be feeding one another, Friday brought the first meaningful interruption to that boogeyman loop.
Nonetheless, the real market event is still sitting directly ahead.
US CPI now lands into a market already softened by an ugly combination of higher energy prices, surging global yields, and a growing belief that the Federal Reserve may have to hike again next week. Money markets are putting roughly two-thirds odds on a move, which means tonight’s inflation print is not arriving on a blank canvas. It is walking into a room where the furniture has already been rearranged.
Headline CPI is expected to accelerate to 0.4% month on month, in part because of gasoline, while core inflation is expected to remain considerably cooler around 0.2%. That split is where the argument gets interesting. A hot headline number can still rattle the bond market because investors have just spent a week staring at crude, diesel and the possibility of second-round inflation. But if core behaves itself, the Fed debate becomes much more nuanced than simply looking at the price of a barrel and reaching for the hike button.
Asia had already paid the price before that relief arrived.
Regional equities fell sharply, Australian three-year yields briefly pushed above 5% to their highest level since 2011, and New Zealand two-year yields jumped roughly 25 basis points. That was the market digesting Thursday’s message in its purest form: oil up, inflation risk up, rate expectations up and duration down.
That move also carries a broader warning. The shock is no longer confined to the front end of the US curve. Global sovereign yields have been pushing toward levels not seen in years, which means equity investors are being asked to carry increasingly expensive valuations against a rising cost of capital. For now, earnings are doing a lot of the heavy lifting. Oracle’s jump after stronger signs from its data center business was another reminder that the AI capex story still has enough horsepower to keep investors engaged even when the macro road gets rough.
But earnings can only absorb so much pressure from rates.
That is why today’s rebound feels more like the market leaning against the ropes between rounds than the start of a clean risk reset. Lower oil has helped. Softer Treasury yields have helped. Yet neither has moved far enough to erase the basic question hanging over every asset class into CPI.
If inflation comes in benign enough to pull next week’s Fed hike back toward a coin toss, equities probably get another leg of relief, and the bond market can finally stop trading every oil headline like an inflation report. If CPI runs hot, particularly at the core, then this morning’s rally risks becoming little more than an intermission.
For Asia, that leaves the handoff unusually simple.