Renewed US-Iran hostilities lifted oil prices, pilling over into higher global bond yields and weaker equity markets. US 10-year Treasury yield trades above 4.76%, its highest level since January 2025

It has been an uneventful end to August, following a fairly uneventful month overall. Bond and equity markets were modestly weaker as the US and Iran exchanged missile fire in the Middle East after a month of reduced military activity.

The new week began with headlines that the US had fired missiles at Iranian rocket launchers to prevent mines being deployed into the Strait of Hormuz, with Iran retaliating by firing missiles towards Jordan and the UAE. These were the first US strikes in about a month, following President Trump’s pivot to economic warfare. Oil prices are up around 2½%, taking Brent crude back above USD90 per barrel.

The impact of higher oil prices has spilled over into bond and equity markets. Global rates are higher, although the moves have been modest. Even so, the US 10-year rate traded above 4.76% overnight, its highest level since January 2025. If the 4.8% level breaks, the next support level for Treasuries would be around a yield of 5%, last reached in October 2023. The 30-year rate is up 5bps to 5.25%, having already traded earlier in the month at levels not seen since 2007.

Higher yields have weighed on sentiment towards US equities, with all sectors apart from Energy trading lower. The S&P 500 is currently down about ½%, with a similar fall for the Nasdaq. The Euro Stoxx 600 index closed 0.6% lower.

In an interview with Reuters, US Treasury Secretary Bessent said he expected BoJ Governor Ueda to “do the right thing” on monetary policy, with the backing of PM Takaichi, when asked whether the central bank should consider consecutive interest rate hikes to counter yen weakness. While the market prices in a good chance of a BoJ hike at the next meeting in September, the following hike is not fully priced until January.

Overnight, Bessent conveyed similar messages in a CNBC interview, adding that he believed “the Japanese government and BoJ will do the things that will lead to a stronger yen”. On his recent attempt to control the long end of the Treasury market, he said hedge fund managers like to speed things up, while his job is to “speed things down”. He added that “the market is the market” and that he was not trying to change its direction.

In economic news, German CPI inflation rose by less than expected, with the annual rate ticking up to 2.9%, compared with the 3.1% expected by consensus. Data released for France, Spain, Belgium, Ireland and Portugal showed a consistent trend, with annual inflation in August higher than in July across all countries, rising by between three and six tenths. The market is fully pricing the ECB to lift rates for a second time this cycle at its next meeting in September, in response to higher inflation.

Yesterday, China’s composite PMI rose slightly to 49.5 in July, with the non-manufacturing index flat and all the gain coming from the manufacturing sector. Adverse weather appears to have weighed on the construction sector, but overall the figures continue to support the view of a sluggish growth backdrop for China.

Currency markets have shown only small moves for the day. There was no obvious impact on currencies around the end-of-month London fix. Higher oil prices have supported the CAD, which is up 0.3% from last week’s close, while NZD/CAD is slightly weaker, dipping below 0.82 overnight. The NZD has been tightly rangebound overnight, showing minimal movement around 0.5915. The same pattern is evident across the crosses.

The domestic rates market had a quiet end to the month, with only small movements in rates. There was lingering pay-side pressure at the short end of the swaps market, with some receivers looking to reduce positions ahead of tomorrow’s RBNZ MPS. The 2-year swap rate rose 2bps to 3.72%, resulting in some curve flattening, while the 10-year rate fell 1bp to 4.44%. NZGBs showed similar moves and a flattening bias.

There was little market reaction to ANZ’s Business Outlook survey, which showed only small movements in activity indicators. These remain near historically high levels and, if taken literally, are consistent with a strong economy. The inflation indicators remained far too high for comfort and moved in the wrong direction for the RBNZ, with year-ahead inflation expectations rising slightly to 3.26% and pricing intentions lifting to 51%.

On the economic calendar, Australian current account and China RatingDog PMI data are released today. Tonight, Euro area CPI data for August are expected to show the annual headline rate increasing to 3.3%, with the core rate steady at 2.5%. In the US, the ISM manufacturing survey and JOLTS data are released, with both expected to show little movement.

Jason Wong is the senior Markets Strategist at BNZ Markets.