Rising oil, two-way tariffs and a likely rate hike
What does $100 oil mean?
Last week, oil sat near $90 per barrel, and central banks were still arguing about potential rate increases. This week, oil went above $100, and the argument largely ended. It was oil’s first move above that mark since July, after Iran warned it would act against any threat, and the conflict escalated again.
The stock market stopped shrugging. In a holiday-shortened week, U.S. stocks fell as the damage was concentrated in smaller domestic stocks.
The reason for this was momentum: for months, oil was a geopolitical headline the market could look through. At $100 it becomes an inflation input that enters every forecast, and it is precisely the spillover the Bank of Canada flagged last week.
What are the chances of a U.S. rate hike?
The data confirmed inflation concerns. The August producer price index rose by 0.4%, lifting the annual rate to 5.4%, and the odds of a rate increase at next week’s meeting of the U.S. Federal Reserve (the Fed) jumped to roughly 70% from 61% a day earlier. Markets are now pricing a possible second increase before year-end, and one major bank estimates that core PCE (a measure of inflation that excludes food and energy) is tracking at a pace that would justify such a move.
As a result, the 10-year U.S. Treasury yield (the interest rate on 10-year U.S. government bonds) closed at 4.83% Wednesday, its highest since October 2023, and pushed higher again Thursday, with Treasury yields setting fresh 52-week highs.
The detail worth noticing came from Washington. The U.S. Treasury Secretary, Scott Bessent, announced that the Treasury would triple its next bond buyback program specifically to curb rising borrowing costs, but bond yields rose anyway. When a buyer of that size announces itself and the market moves against it, the pressure is fundamental rather than technical. That got far less attention than it deserved. Listen to this week’s podcast for more details.
How is Canada retaliating in the tariff war?
Canada’s tariff retaliation took effect Tuesday at 12:01 a.m., matching the American action dollar for dollar. It covers $27.6 billion of U.S. goods at rates of 15%, 25% and 50% across more than 700 categories, including steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics. American steel, aluminum and iron now face 50% tariffs entering Canada.
Two weeks ago, we argued that tariffs are not a market story, since materials, energy and financials make up roughly 70% of companies on the Toronto Stock Exchange and sit largely outside the tariff net. That still holds, and this week energy is being paid well for it. But the indirect consequences are now live. Both governments are adding costs to goods at the same moment oil is adding costs to everything else, and central banks must treat that as inflation, regardless of its source.
What can we expect from next week’s Fed meeting?
The Federal Open Market Committee (the Fed’s rate-setting committee) will meet September 15-16; a rate increase is now the more likely case, rather than the risk case. After a week when oil cleared $100, the U.S. Treasury tried to cap bond yields and failed, and the trade war turned two ways, the question is no longer whether the Fed moves, but when.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
