For two years the only question in markets was when rates would come down. That question has been withdrawn. The US 10-year Treasury yield has broken through 5%, its highest since 2007, and the 30-year sits at 5.37%, a level last seen in June 2004. The US Federal Reserve meets on Thursday morning our time and the market prices a hike at better than 90%, up from 59% a week ago. It would be the first increase since 2023. Closer to home the Australian 10-year yield closed Tuesday at 5.42%, a 15-year high, and the market now puts the chance of the Reserve Bank lifting the cash rate to 4.60% on 29 September at more than 80%. A month ago that was a fringe view.
What makes this awkward is the cause. This is not an economy running hot. Drones launched from Iraq struck Saudi Arabia's East-West pipeline, a 7 million barrel a day line that is the main way crude gets out of the Gulf without passing through the Strait of Hormuz, and it has been shut since Thursday. Brent is up 2.2% to US$108.60, its tenth gain in eleven sessions, and crude is up more than 27% since the Iran war began. US diesel has hit a record US$6 a gallon. Central banks cannot drill for oil. They are being pushed into tightening by a supply shock, which is the single least useful thing a rate rise can fix, and they are doing it anyway because the alternative is losing control of inflation expectations. The Congressional Budget Office now puts the cost of the war at US$38 billion, rising by US$3 billion a month.
Last night was the second straight fall and it was orderly rather than panicked. The S&P 500 lost 0.45% to 7,586, the Nasdaq Composite fell 0.78% to 25,982 and the Dow shed 0.63% to 52,093. Energy was the only sector with conviction, up 2.26% on the oil rally, while consumer discretionary was worst at -1.76% as restaurants, apparel and leisure names wore the read-through from petrol prices. The VIX rose just 0.58%. Nobody is hedging for a crash. They are repricing the discount rate.
The bond market is now the story, and it has displaced the one everyone was worried about a month ago. A Bank of America survey of global fund managers this week found rising bond yields have replaced AI bubble concerns as the top tail risk. Tuesday's 20-year auction drew the worst foreign demand on record, and bond traders have added short positions at the fastest pace since early 2025. The US 10-year has risen in seven straight months, matching the longest run since 2011. The 2-year sits at 4.67%.
That leaves Kevin Warsh in a genuine bind on Thursday morning. August CPI, released Friday night, came in at 0.4% on the month and 3.4% on the year, both in line, but core rose 0.3% against a 0.2% pace in July and 2.4% on the year. Petrol contributed more than a third of the monthly rise. Hike, and he tightens into an energy shock seven weeks out from the US midterms with a President who has publicly demanded cuts. Hold, and a bond market that has already priced the move will assume the Fed has stopped caring about inflation, which pushes yields higher again. Our read is that he hikes, because the credibility cost of not doing it is now larger than the political cost of doing it. Note the market has moved past Thursday already: it prices roughly a 70% chance of two rises by the end of the year.
Three sessions, and the damage came from yields rather than earnings. Friday the ASX 200 closed down 78 points or 0.89% at 8,741, capping a 2.94% week, the worst since the war broke out. Monday it scraped back 9 points to 8,750, snapping a four-session slide. Tuesday it gave up 77 points or 0.88% to close at 8,672, the lowest since June and roughly 6.5% below the record close of 9,271 set on Thursday 6 August. This morning the index is trading around 8,692, up 0.22% as at 10:30am, though the session has a long way to run and that figure is not a close.
The sector split has been consistent and it tells you exactly what the market is pricing. Rates-sensitive and hard-asset names have been sold, defensives bought. On Tuesday Materials was worst at -2.2%, with BHP (BHP -2.2%), Rio Tinto (RIO -2.2%), Newmont (NEM -2.8%) and Mineral Resources (MIN -4.3%) all heavy as iron ore fell for a fifth straight session on soft Chinese retail sales and a deepening decline in fixed asset investment. The gold sector dropped 3.1%. Financials fell 1.1% with CBA (CBA -1.6%), NAB (NAB -1.3%), ANZ (ANZ -1.1%) and Macquarie (MQG -2.5%) all lower, which is the part worth noticing: banks are supposed to like higher rates, and they are being sold anyway because the market is pricing the funding cost and the credit cycle ahead of the margin. Healthcare was the standout at +1.5%, led by Telix (TLX +8.6%) on the back of FDA approval for Pixclara and a Bell Potter upgrade, with CSL (CSL +1.6%) alongside it. Consumer staples and discretionary both added 0.9%.
The local rates picture has moved fast. The Australian 10-year rose another 6 basis points on Tuesday to 5.42% and the 2-year has been above 5%. Reserve Bank Assistant Governor Hunter flagged renewed oil-driven inflation pressure on Monday, which is about as close to a signal as you get two weeks out from a meeting. The higher borrowing cost is not abstract either: on Marcus Today's numbers it is set to add around $10 billion to the Australian budget deficit. Past performance is not a reliable indicator of future performance.
Oil is running the whole show. Brent rose 2.16% to US$108.60 last night and WTI rose 3.52%, the tenth gain in eleven sessions, with crude up more than 27% since the war began and up 23% in September alone. Saudi Arabia has now suspended shipments from the Red Sea port of Yanbu on top of the East-West pipeline closure, which some reporting suggests could run for six weeks, forcing the kingdom to push more crude back through Hormuz. Saudi exports fell to 3 million barrels a day in August, the lowest on record, and production is at its weakest since 1990. The cost of moving the stuff has gone with it: shipping US crude to Asia now runs about US$45 million a cargo against US$18 million before the war, and tankers are earning US$1 million a day.
Everything else has been a casualty of the stronger US dollar that comes with higher yields. Gold fell 0.43% to US$4,291.60, down from US$4,364.50 on Thursday, which is worth sitting with: an actual Middle East war, an oil shock and an inflation scare, and gold is going down. That is what a 5% risk-free rate does to an asset with no yield. Iron ore fell 1.15% to US$98 a tonne. Copper set a record above US$14,875 a tonne on the London Metal Exchange last week on expectations of US tariffs on refined imports, then reversed hard when the White House decision stalled. The Australian dollar has fallen to 71.28 US cents from 71.73 on Friday, and bitcoin dropped 4.03% to US$75,715 after the US Senate blocked the Clarity Act by a single vote, 49 to 50.
The other event of the period was an essay. Anthropic chief executive Dario Amodei published roughly 3,800 words on Saturday calling for AI labs to pace frontier development, and Sam Altman and Elon Musk both put their names to it. Monday night the market sold first: the SOX semiconductor index fell 5.86%, its worst session since July, with Nvidia (NVDA -3.4%), Micron (MU -6%), Intel (INTC -5%) and Marvell (MRVL -7%) all hit, Samsung and SK Hynix down more than 5% in Seoul and SoftBank down nearly 11% in Tokyo. President Trump called the whole thing a "SICK conspiracy". China called it fearmongering.
What is more interesting is where the damage actually landed. The Mag7 basket rose 0.30% that night, with Alphabet (GOOGL +3.1%), Meta (META +2.7%) and Microsoft (MSFT +2.0%) all up. The pain was concentrated in the picks and shovels: Corning (GLW -13.7%), HPE (HPE -10.8%), Celestica (CLS -8.8%), Vertiv (VRT -7.6%) and Arista (ANET -5.9%). Corning sells the fibre, Vertiv the cooling, Celestica the racks. That is a market repricing the timing of the build, not the demand for the product, and we think the distinction matters. Separately Bank of America (BAC -5.1%) had its worst intraday drop since April 2025 after chief executive Brian Moynihan warned third-quarter trading revenue would be flat, dragging Goldman Sachs (GS -3.9%) and Morgan Stanley (MS -3.6%) with it. Last night JPMorgan (JPM +0.7%) said the opposite, flagging banking fees and trading revenue on track to rise. Both cannot be right.
Locally the interesting names were takeover and dividend stories rather than macro. FleetPartners (FPR +12.1%) jumped on Monday after granting three suitors deeper access on proposals at $4.55 to $4.65 a share. Cleanaway (CWY +4.7%) firmed as EQT pressed on with due diligence. GPT Group (GPT +2.5%) bought 66 Eagle Street in Brisbane for $380 million. New Hope (NHC +3.0%) delivered an FY26 result with revenue of $1.77 billion and net profit of $161 million, and doubled the final dividend to 30 cents fully franked, taking the full year to 40 cents. Zip (ZIP +2.4%) announced a $50 million buyback. On the other side, GQG Partners (GQG -9.5%) fell on Friday after August funds under management dropped to $149.2 billion from $156.4 billion, of which $4.3 billion was net outflows, and NextDC (NXT -4.0%) wore the AI read-through on Tuesday. Australian tech fell in ten of eleven sessions to Monday before catching a bid.
The war is now the dominant input into every asset price on this page, and it is not converging. Houthi forces seized Yemen's Mocha port and reached the Hanish islands in the Red Sea, closing off the alternative export route while the East-West pipeline is down. A planned meeting in Oman between Iran and Gulf states to discuss a temporary shipping lane through the Strait of Hormuz was postponed "in the interests of consensus", with Bahrain having already ruled out attending and Saudi Arabia reportedly holding reservations. US Energy Secretary Chris Wright put total flows through Hormuz plus the bypass pipelines back at "two-thirds or north of two-thirds" of pre-war levels, which he described as tight but not overly tight. Fresh strikes on shipping were reported over the weekend near Qeshm and Hengam islands.
On duration, the reporting is not encouraging. Vice President Vance and Secretary Rubio have reportedly told the President the conflict could run to the end of his term in January 2029, which sits awkwardly with his own line that it ends after the midterms. The European Central Bank has now hiked twice since the war began and signalled it may go again in October. For portfolios the point is simple: this is no longer a headline risk that resolves on a ceasefire rumour. It has become a persistent input into the inflation rate, and therefore into the discount rate applied to every asset you own.
Tonight, 10:30pm. US retail sales for August, forecast to rise 0.3% on the month after a July drop. A strong number makes Thursday's hike easier to justify.
Thursday, 4am. The Federal Reserve decision, with the press conference at 4:30am and updated economic projections. More than 90% priced for a hike. The dot plot matters more than the move: the market already prices roughly a 70% chance of two rises by year end, so the risk is a Fed that signals fewer.
Thursday, 9pm. The Bank of England, expected to hold. Thursday also brings US building permits, housing starts and the Philadelphia Fed survey.
Friday, 1pm. The Bank of Japan, where a 25 basis point rise to 1.25% is expected, the second this year after June's move to 1%. A hiking BoJ is a live risk to global duration.
Tuesday 29 September. The Reserve Bank, with more than 80% priced for a lift to 4.60%.
Thursday 24 September. Australian labour force data for August. The last print had unemployment at 4.5%.
This week on the ASX, AIA, FLT, SNL, SKS and MAH go ex-dividend.