Oil nears US$110, Treasury yields clip 5% as AI fears weigh on sentiment

Preview: Brent pushes toward US$110, the US 10-year Treasury yield breaches 5%, along with an AI warning.

Oil spikes and yields rise

Market sentiment was largely risk-off on Monday amid elevated oil prices. Oil benchmarks caught a bid, sending Brent crude higher during Asia and the European morning session towards US$110/barrel. This followed attacks on shipping in the Strait of Hormuz and a drone strike that prompted Saudi Arabia to temporarily shut a pipeline, which, of course, added to inflation concerns.

I am closely watching US$108.40 resistance on Brent's daily chart, as a clean break above it unlocks the trapdoor to the May peaks of US$112.72 and perhaps US$119.50, forged back in early March. 

In fixed income, the US benchmark 10-year Treasury yield clipped 5% yesterday – a level many analysts believe could start to ripple through the economy. This includes higher consumer borrowing and government debt costs, as well as a potential headwind for stocks.

Rising energy prices, inflation concerns, bloated government debt, a flood of corporate debt, and increased bets on Fed rate hikes have bolstered the rise in bond yields. Markets are patiently awaiting tomorrow’s Fed decision, with the Fed funds futures curve suggesting a rate hike is firmly on the table, while the OIS curve indicates it is more of a 50/50 bet. 

AI slowdown fears hit tech

Equities took a hit at the start of trading yesterday, fuelled by Anthropic CEO Dario Amodei, who published an essay over the weekend urging AI companies to slow the pace of frontier model development, with OpenAI's Sam Altman publicly agreeing. The tech-heavy Nasdaq ended the session lower by 0.8%.

USD firm – JPY steady

In FX, the USD index continued to climb amid rising yields. The yen, meanwhile, has been the steadier performer, helped by a BoJ that appears close to a fully telegraphed rate rise on Friday, with Governor Ueda well practised at using the press conference to manage expectations rather than spring surprises.

Canadian inflation comes in as expected

The August Canadian CPI inflation report landed yesterday, and despite a 30-second delay, the release was largely in line with market expectations. Headline YY remained unchanged at 3%, and the BoC’s preferred underlying measures (CPI median and Trim) also held at July’s levels of 2% and 1.9%, respectively.

While this suggests inflationary pressures remain contained, the BoC remain on alert for second-round effects. Investors have increased year-end rate-hike bets to around 76%, from 30% a week ago, following comments from BoC Governor Tiff Macklem regarding possible rate increases ‘if inflation proves problematic’.

UK jobs data eyed this morning

This week welcomes a busy slate of UK event risk, including jobs data today, CPI inflation tomorrow, a BoE update on Thursday, and retail sales figures on Friday. Economists expect unemployment to tick higher to 5% from 4.9% (max/min est. range between 5.1% and 4.9%). A print at 5% would match March’s reading and break the three-straight prints at 4.9%.

Earnings growth is forecast to cool to 3.9% from 4.1% (max/min est. range between 5.1% and 4.9%), with the ex-bonus measure anticipated to hold steady at 3.5%.

My read here for GBP is towards a miss – unemployment ticking up to 5% or higher, with earnings growth cooling faster than the consensus 3.9% suggests. I have to admit the conviction behind that call is more instinct than a fully formed thesis, but a softening labour market alongside energy-driven inflation puts the BoE in an increasingly uncomfortable spot, and I think the data is starting to catch up with that tension.

A broad miss on both counts would, in my view, weigh on GBP: it pulls the rug out from under the market's recent hawkish repricing of Thursday's decision, even as sticky energy-led inflation keeps the Bank from committing to outright easing.