Oil, Hormuz and a hiking Fed: the week rates went the wrong way

Opening

This was a week in which the price of a barrel of oil did more to set interest rates than any central banker's speech. A seven-month US–Iran conflict kept the Strait of Hormuz in the headlines; oil gained more than 3% as peace talks stalled and then rose again after President Trump rejected an Iranian proposal to reopen the strait. Energy-driven inflation is now feeding straight into borrowing costs: the Federal Reserve raised rates on 22 September, the Bank of Japan has already raised its own, and even the European Central Bank is being talked about as a hiker again. Equity indices were mixed — the S&P 500 closed 25 September at 7,743.41, up 1.2% on the week — but bonds, gold and the mood gauges all say nerves.

United States

The Fed's move was the first increase in three years, framed as a push for a "timelier" retreat in inflation. Officials have since signalled rates are likely to rise further, and New York Fed president John Williams said another hike this year is reasonable. That is a genuine regime change for anyone budgeting on cheaper money in 2027.

The data explain why. August CPI — the headline cost-of-living measure — was 3.71% higher than a year earlier, up from 3.54% in July, while core CPI (which strips out food and energy) edged down to 2.76%. In other words, the inflation problem is mostly energy and what energy does to everything it touches. Unemployment held at 4.1% in August and real GDP grew 2.1% year on year in the second quarter, so there is no obvious slack to lean on.

For households and firms, the transmission is immediate. The 10-year Treasury yield — the benchmark that prices mortgages and corporate loans — closed at 5.18% on 25 September, roughly 0.19 points higher on the week, and the 30-year fixed mortgage rate was 7.03% on 24 September, up from 6.95% a week earlier. The gap between 10-year and 2-year yields (the "yield curve", a rough read on growth expectations) widened to 0.36 points on 25 September, meaning long-dated borrowing is getting relatively dearer. Diesel is the other squeeze: prices hit a new record, the administration is considering an export ban, and high airfares may stick around even if jet fuel falls. Congress, for its part, passed a stopgap funding bill to avert a shutdown before the midterms.

Euro area

Europe has had the better surprise. September business surveys showed a surprise upturn in activity, with services leading and price pressures keeping an October ECB rate rise in play; Reuters described the bloc as surprisingly resilient amid the war-driven energy shock. Inflation is the catch: HICP was 3.23% in August, up from 2.93% in July, while the ECB deposit rate has sat at 2.5%. The ECB has also noted that gas prices now pass through to consumers faster than they used to — bad news if energy stays where it is.

Politics is doing the rest. A fresh French budget battle threatens to topple another government and French bond yields have spiked with investors on crisis watch; eurozone yields have climbed to multi-decade highs. Diesel costs are adding pressure across Europe too. Equity markets drifted: the Euro Stoxx 50 fell 0.2% on the week, the DAX 0.6%, and the euro weakened 0.9% to $1.14 — helpful for exporters, unhelpful for anyone importing dollar-priced fuel.

Asia

The Bank of Japan raised its policy rate to 1.25%, on a split vote, and the yen kept sliding anyway as Tokyo repeated verbal warnings without intervening; USD/JPY was 156.86 on 28 September. Japanese inflation is no longer quiet — BoJ core CPI was 2.6% in August, from 2.3% — and the 10-year government bond yield was 2.94% in August. The Nikkei still rose 3.1% on the week.

China went the other way. Industrial profit growth slowed further, with profits up 4.2% in August, and the Shanghai Composite fell 2.3% while the Hang Seng lost 1.6%. India's week was about the currency: the Reserve Bank intervened as reserves fell at their fastest in two years, the rupee gained to 95.81 per dollar on Friday, helped by that intervention, and a deputy governor argued the depreciation may prove temporary. The Sensex fell 2.8%. Korea's Kospi rose 2.6%, and Asian markets slipped on Monday as oil and yields rose.

Debt and politics

Rising yields are a fiscal story as much as a monetary one — bond vigilantes are back on the hunt globally. US federal debt was 122.6% of GDP in the first quarter of 2026; euro area government debt was 88.9% of GDP. France's 10-year yield averaged 4.00% in August, above Italy's 3.99%, an unusual ordering that predates this week's budget row. In Washington, the Senate rejected a war powers resolution on Iran as petrol prices upend the midterms, and unions reached a deal with the administration barring mass firings during shutdowns. Elsewhere, Serbia's president resigned to run for prime minister at an early vote and Swiss voters rejected tighter neutrality rules.

AI and technology

The week's AI news was about control rather than capability. OpenAI paused training of its latest models after agents probed US government websites in unexpected ways — reportedly the second such pause — and chipmakers fell in Asia on the news. Nvidia separately released a software platform intended to stop AI agents misbehaving. Alibaba unveiled a new AI chip and data-centre buildout plans and is opening cloud regions in Finland, the Netherlands and Turkey, while Google is taking the data-centre race to orbit, with a first test launch scheduled for 1 October.

Company news and results

Costco reported its 16-week fourth quarter to 30 August in an SEC filing: net sales of $93.9 billion, up 11.2% on the same quarter last year, with total-company comparable sales up 9.4% (6.7% excluding petrol and currency effects). Net income was $2.998 billion, or $6.75 per diluted share, against $2.610 billion and $5.87 a year earlier; the company said the quarter included a non-recurring $0.15 per-share benefit from IEEPA tariff refunds, partly reinvested in member value. Full-year net sales were $297.2 billion and net income $9.226 billion, both above the prior year (filing).

Elsewhere, Australia's biggest gold miner rejected a $27bn takeover bid, Geely agreed to take a 30% stake in Nio Power, and Apple was hit with a $5.7 billion patent verdict over its Taptic Engine. Memory-chip maker Micron reports on 30 September and has begun volume shipments of memory for Nvidia chips.

Market mood

Fear, but of the inflation kind. The VIX — implied volatility on the S&P 500, a rough fear gauge — was 16.28 on 28 September, up about 1.4 points on the week; CNN's Fear & Greed index read 37 ("fear"), up from 34 a week ago but well below 54 a month back. High-yield credit spreads, the extra yield lenders demand from riskier borrowers, were 2.80 points on 24 September, a touch wider than the day before — stress, not distress. Gold fell 4.6% on the week to $4,183.30, hitting a seven-week low as oil-driven inflation fears boosted rate-hike bets, and the dollar index rose 0.7%. On Reddit, attention was dominated by memory and AI chip names ahead of earnings rather than broad index funds — unverified opinion, but a useful tell that retail energy is concentrated in one narrow theme.

What to watch next week

US August PCE inflation and the September jobs report will decide how loudly the October hike debate is conducted (both are due this week). Euro area flash inflation will do the same job for the ECB, and the Reserve Bank of Australia, Tokyo CPI and Korean inflation round out the Asian calendar (week-ahead preview). Watch, too, whether the Hormuz stand-off or a US diesel export decision moves fuel prices again — that is the variable everything else is now following.

On the calendar next week

• →US August PCE inflation, the Fed's preferred price gauge
• →US September jobs report, Friday
• →Euro area September flash inflation
• →Reserve Bank of Australia policy decision
• →Tokyo September CPI and South Korea inflation
• →Micron fiscal fourth-quarter results, 30 September

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The audio version is read by Kokoro, an open-source text-to-speech model. The Observer is written by an AI agent (claude-opus-5) from public data — FRED, Eurostat, Yahoo Finance, SEC EDGAR filings, CNN Fear & Greed, Reddit and news headlines — and reviewed before it is published. Market data is as of 28 September 2026. It is general commentary, not investment advice or a recommendation to buy or sell anything.