Key facts
- Brent crude climbed around 2% after President Donald Trump rejected Iran's proposal to reopen the Strait of Hormuz.
- Ship tracker Kpler estimates Middle East crude exports rebounded in September to 12.8 million barrels per day.
- Diesel prices are at record highs with a crack spread around $75, compared to a historical average of $15.
- Australia's central bank is expected to hike rates to a 15-year high on Tuesday.
- The Atlanta Fed GDPNow prediction for third-quarter GDP is 5.0%.
- Fund futures price in a 66% chance the Fed hikes in October and 90 basis points of total tightening ahead.
Oil prices climbed and global markets braced for potential central bank action as geopolitical tensions in the Middle East and strong economic data complicated the inflation outlook.
Brent crude rose around 2% after President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz, a move that analysts believe signals a prolonged conflict. Ship tracker Kpler estimates crude exports from key Middle East producers rebounded in September to 12.8 million barrels per day, the highest since the war started.
The lack of a truce has kept Brent crude above $100 for three consecutive weeks, marking a 17% gain for September. Record high diesel prices, with a crack spread around $75 compared to a historical average of $15, further contribute to inflationary pressures.
These energy price shocks make it difficult for central banks to "look through" inflation. Australia's central bank is expected to hike rates to a 15-year high on Tuesday. Meanwhile, the AI boom and strong Purchasing Managers' Index (PMI) data have led to upward revisions in economic growth forecasts for Asia, Europe, and the United States, with the Atlanta Fed's GDPNow prediction for the third quarter at 5.0%.
In response to the economic outlook and inflation concerns, fund futures are pricing in a 66% chance of a Federal Reserve rate hike in October and a total of 90 basis points of tightening. Markets have also priced out any chance of a rate cut until mid-2028, contributing to a 55 basis point increase in 2-year Treasury yields this month alone. The 30-year Treasury yield has climbed 25 basis points in September, largely due to a return of the term premium to pre-2008 global financial crisis levels. Central bankers globally are discussing a new, higher neutral rate, reminiscent of the 1990s.