Global equity and bond markets paused their recent selloff Friday as crude prices retreated from their highest level in several months. Brent crude briefly reached $109.97 a barrel after jumping 6% in the previous session, before falling almost 2% to around $105.90. Despite the pullback, oil remained on track for a weekly increase of approximately 10%, keeping inflation concerns firmly in focus.

The decline in crude provided some immediate relief to risk assets, but investors remain concerned that restricted oil flows through the Strait of Hormuz could persist. Continued military exchanges between the U.S. and Iran, alongside developments involving Iran-aligned Houthi forces and regional energy infrastructure, are increasing the probability that the disruption could become more prolonged.

Treasury Yields Signal a Higher-for-Longer Environment

The bond market continues to reflect the changing inflation outlook. The benchmark 10-year Treasury yield was little changed around 4.946% after reaching 4.979%, its highest level in almost three years. The 30-year yield briefly climbed to 5.3836%, establishing another 19-year high before easing to approximately 5.359%.

The shorter end of the curve is also under pressure. The 2-year Treasury yield reached 4.5961%, a 14-month high, after jumping 12 basis points Thursday. The move reflects increasing expectations that the Federal Reserve may need to raise interest rates to contain inflation. Markets were pricing roughly a 67% probability of a rate increase this month, according to the source.

The bond-market weakness also reflects disappointment over the Treasury’s latest buyback operation, which came in below some investors’ expectations. This demonstrates that official measures to support longer-term debt may have limited influence when markets are simultaneously reassessing inflation and monetary-policy risks.

CPI Becomes the Next Major Test

Investors are now focused heavily on the August U.S. Consumer Price Index report. Expectations center on a 0.2% monthly increase in core CPI, but recent Producer Price Index data has raised concerns that underlying inflation may prove stickier than anticipated.

The importance of the report has increased because oil prices have surged since much of the August economic data was collected. A CPI reading significantly above expectations could strengthen the argument for higher interest rates and trigger sharp moves across financial markets. Conversely, a softer result could temporarily ease pressure on Treasury yields and risk assets.

Global Central Banks Move Toward Tighter Policy

The inflation shock is increasingly becoming a global monetary-policy issue. JPMorgan analysts now expect eight of nine developed-market central banks to raise rates by year-end, including the Federal Reserve, Bank of Japan and four European central banks, as well as Australia and New Zealand’s central banks.

The European Central Bank has already raised rates for the second time this year, while some policymakers see further tightening as a possibility. The prospect of higher rates across multiple economies reinforces the market’s emerging “higher for longer” narrative, particularly if energy prices remain elevated.

Equities Remain Vulnerable Despite the Rebound

European equities received some support from the decline in oil and gas prices, with the STOXX 600 rising 0.2% Friday but remaining down about 2% for the week. U.S. equity futures also recovered, with Nasdaq futures up 0.3% and S&P 500 futures gaining 0.4%.

Asian markets were less resilient. MSCI’s broad Asia-Pacific index excluding Japan fell 1.5%, while Japan’s Nikkei dropped 1.9%. The U.S. dollar remained near 99.04 after strengthening alongside higher Treasury yields, while gold recovered 0.6% to approximately $4,342 an ounce.

Markets now face a delicate balance between temporary relief from lower oil prices and the possibility of a prolonged energy shock. If crude continues to retreat, some pressure on bonds and equities could ease. However, persistent supply disruptions, sticky core inflation and rising expectations for central-bank tightening could extend the recent volatility. Friday’s CPI report will therefore be closely watched for evidence of whether inflation is accelerating enough to fundamentally change the path of monetary policy.