Messy market mood as oil irks By Reuters

A look at the day ahead in U.S. and global markets by Mike Dolan

World markets have hunkered down ahead of the week’s big central bank decisions, uncomfortable about inflation signals being sent by rising oil prices and wary of over exuberance about the proximity of peak interest rates.

Even as incoming economic soundings and forecasts blow hot and cold about the growth outlook, continues to tick up to its highest levels of the year – stalking $100 per barrel for the first time since the summer of 2022.

The crude spur is more supply than demand related and most fingers point to the latest output cuts from Saudi Arabia and Russia. But U.S. production is falling too and the U.S. Energy Information Administration said output from top U.S. shale-producing regions is on track to fall for the third month in a row in October to its lowest since May.

Headline inflation rates are already backing up as a result of the energy price rebound and U.S. gas pump prices rose last week to $3.88 per gallon – the highest since October 2022.

None of this makes easy reading for Federal Reserve policymakers starting their two-day meeting later on Tuesday. While few expect another rate hike this week, all eyes will be on whether Fed projections retain their standing view that another quarter point rise to 5.5-5.75% this year is still in the pipeline.

In the meantime, futures markets are busily lifting Fed rate bets through 2024, with the implied policy rates for mid-year and yearend hitting highs for the cycle and rates through September now all near 5% or above as the ‘higher for longer’ Fed mantra sinks in.

The risks of that scenario for U.S. and global sovereign bond markets may not yet be fully appreciated and a prolonged period of unpredictability may be in store, the Bank for International Settlements warned on Monday. “Business models, trading strategies, that were predicated on that assumption (of rates coming down quickly) are particularly vulnerable to current conditions,” BIS economist Claudio Borio said.

The edginess in Treasuries, where benchmark 10-year yields touched near 16-year highs briefly again on Monday, was spotlighted in data on foreign holdings that showed China’s stash of Treasury securities fell to its lowest 14 years in July even as Japanese and other investors upped their…