Share markets slipped in Asia on Monday as fresh fighting broke out between the U.S. and Iran, lifting oil prices, while bond yields stayed painfully elevated after investors narrowed the odds on a U.S. rate hike.
Brent futures climbed 2.7% to $90.51 a barrel after U.S. forces struck two of Iran's launchers on its island of Larak on Sunday. In response, Iran attacked U.S. forces stationed in Jordan and claimed to have hit a tanker moving through the strait.
President Donald Trump later posted that Kharg Island, Iran's main oil terminal, was being "blown to smithereens," though there was no confirmation of this from the military.
The resulting risk to inflation kept bond markets on edge after Federal Reserve Chair Kevin Warsh emphasised on Friday the central bank had work to do to control inflation.
Markets reacted by lifting the probability of a September rate increase to 57%, shoving short-term Treasury yields sharply higher and flattening the curve.
"We continue to expect that a hike won't come until December, though agree that the September meeting is live," said Michael Feroli, chief U.S. economist at JPMorgan.
"Moreover, regardless of the exact timing of hikes, Warsh's speech suggested a chair more willing to translate his concern about inflation into a policy tightening."
Barclays, for one, now expects the Fed to raise rates by 25 basis points in both September and December.
Key to the chance of an early hike will be the outcome of Friday's August payrolls report and consumer price data due on September 11.
Analysts are forecasting a bounce of 58,000 in jobs, following July's shock drop of 23,000, with unemployment holding at 4.1%. It would probably need a much weaker outcome to greatly lessen the risk of a September rate move.
The inflation threat is expected to spur New Zealand's central bank to hike rates for a second straight meeting on Wednesday, while the Bank of Canada is seen on hold, given the damage a trade war with the U.S. could do to the economy.
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