Oil Prices are Jumping and Markets Don't Care. That's Not Good.

Crude oil is surging, yet bond yields and the US dollar keep falling while gold refuses to decline. Are the markets bracing for a slowdown?

• Treasury bonds have rallied since early October even as crude oil prices surged
• The US dollar is on defense, and the euro is holding up despite Eurozone bond stress nearing 2011 crisis levels
• S&P Global PMI data and a busy week of earnings may decide whether 2027 rate hike bets come off the board

Stocks managed only a tentative bounce after last week’s selloff, and even that faded somewhat into the close. The S&P 500 and the tech-heavy Nasdaq 100 rebounded from familiar levels, but both have traced a series of lower highs and lower lows in the past two weeks, hinting that a major equity market top may be forming.

Meanwhile, Treasury bonds have rallied since the start of October, pushing yields lower even as crude oil prices surged. That turns the war trade on its head. Since the US-Iran war began in late February, markets have treated the conflict as an oil supply shock: pricier energy meant higher inflation, higher interest rates, a stronger US dollar, and weaker gold. That is not what is happening now.

Gold and the dollar are refusing to follow the script

Gold has held its ground despite surging energy prices and last week’s hot US inflation data, all of which might once have sent it lower.

The currency market tells a similar story. The euro should be under heavy pressure. The yield spread between French and German government bonds has widened to around 148 basis points (bps), a hair shy of the roughly 156bps peak reached during the Eurozone debt crisis in 2011. That is the most acute internal stress in Eurozone bond markets since investors feared the currency bloc could break apart over Greek debt. Nevertheless, the single currency is holding firm against the US dollar.

The greenback’s other counterparts reinforce the point. The Australian dollar erased losses suffered after a weak domestic jobs report last week, while the British pound and Canadian dollar appear to be breaking higher out of recent ranges.

The dollar rallied from mid-August as two-year Treasury yields surged on Fed Chair Kevin Warsh’s hawkish speech at the Jackson Hole symposium. Now it can’t seem to find a lifeline. Two-year yields are retreating too, at the end of the curve most sensitive to policy expectations, where competition for long-term funding between debt-laden governments and AI hyperscalers matters less than the Fed outlook.

If higher oil and hot inflation data are not being taken at face value, the markets may be looking past them to a broader problem with economic growth.

Could a consumer squeeze unwind 2027 rate hike bets?

The Fed’s latest Beige Book survey of regional economic conditions set the table. Activity was broadly steady, but growth remained narrowly dependent on manufacturing driven by data centers, defense, and energy-related demand. Consumer-facing sectors are under strain, and that pain is spreading from lower-income to middle-income households. The World Cup boost to spending in the second quarter has faded with no comparable catalyst to replace it.

The squeeze shows up in the numbers. Since the start of the year, consumer price inflation has outpaced wage growth, eroding purchasing power. The University of Michigan’s consumer sentiment index recently notched its second-lowest reading on record, just months after May’s all-time low, while the Conference Board’s gauge sits at its weakest since 2014. The Atlanta Fed’s GDPNow model has trended lower as incoming data have weighed on its third-quarter growth estimate.

Official third-quarter GDP figures arrive October 29, and the mix may matter more than the headline. Household spending makes up roughly 68% of the US economy, while nonresidential business investment, where the data center boom lives, is about 14%. Running that smaller engine as hot as it has been is inflationary in its own right and has helped squeeze households. If investment once again outpaces consumption, as it did in the first quarter, that imbalance would be hard to ignore.

Bond markets seem to be taking notice. Breakeven inflation rates priced into Treasuries have stopped rising with oil. A similar divergence in July came alongside a growth scare.

Rate hike bets still lean hawkish, however. Fed funds futures put the odds of a hold in October above 82% and see a 25bps hike in December as nearly certain, matching the Fed’s projections. For 2027, markets price hikes by March and June, while officials see none, leaving a 50bps gap.

Preliminary October PMI figures from S&P Global arrive later this week, with the US manufacturing and service sector readings expected to soften modestly. Earnings may also test sentiment, with reports due from Netflix, American Express, Tesla, and Meta, while SpaceX has moved its release up to Tuesday after the close.

If the PMIs soften and earnings fail to lift sentiment, some of those 2027 rate hikes may have to come off the board. That could extend the bond rally, keep gold supported, and push the US dollar lower against its major counterparts. Stocks, already flirting with a top, may struggle as growth worries take center stage.

lya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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