Investors spent the week grappling with the price of resilience, as robust growth and rising energy costs complicated the outlook for inflation and interest rates, pushing bond yields to multi-year highs.
- How inflation concerns impacted bond markets
- The resilience of US economic growth despite higher borrowing costs
- Why stock markets fell – and rose – on the interest rate outlook
The week opened with renewed escalation in the Middle East after strikes between the United States and Iran raised concerns about the security of energy supplies moving through the Strait of Hormuz. Markets quickly reacted. Brent crude oil prices climbed from around $90 a barrel at the start of the week to above $95, while European natural-gas prices rose to almost €74 per megawatt hour, their highest level since early 2023. Investors worried that higher energy costs could keep inflation high just as central banks were hoping price pressures were coming under control.
Investors worried that higher energy costs could keep inflation high
Those concerns quickly spilled into bond markets, where investors demanded higher returns to lend money to governments. The yield on the US ten-year Treasury reached 4.80 per cent, its highest level since late 2023. In Europe, Germany’s ten-year government bond yield climbed to its highest level since 2011, and French government borrowing costs touched levels not seen since the financial crisis. Even Japan, which for years has had ultra-low interest rates, saw its ten-year yield reach three per cent for the first time in three decades.
The rise in yields weighed on equity markets. The S&P 500 fell by more than one per cent in the first two trading days of the week, and European shares struggled. Technology companies came under pressure as higher borrowing costs reduce the value of future earnings. Semiconductor stocks were among the weakest performers, reflecting concerns that lofty investor expectations had left little room for disappointment.
Beneath the inflation concerns, the economic backdrop remained surprisingly resilient
Beneath the inflation concerns, the economic backdrop remained surprisingly resilient. Data in the US continued to signal a healthy economy, with business activity holding up better than expected and consumer demand remaining strong despite higher borrowing costs. The ISM Services Index rose to 55.4, its strongest reading in six months, suggesting the world’s largest economy continues to grow. For investors, that was encouraging news, although stronger growth also raises the risk that inflation remains more persistent than central banks would like.
By Thursday, sentiment began to shift. Federal Reserve (Fed) Governor Christopher Waller commented that recent data suggested inflation was gradually moving in the right direction and indicated he could favour leaving rates unchanged if that progress continued. Investors found this encouraging and quickly scaled back expectations for another near-term rate rise. The probability of a September Fed hike fell from 63 per cent to 51 per cent. The rise in bond yields also paused, putting less pressure on the Fed to raise interest rates.
This week’s market story was one of resilience coming at a cost
By Thursday’s close, the S&P 500 had risen by 1.1 per cent, its strongest daily gain in nearly a month. More than two-thirds of stocks in the index finished higher, suggesting the rally was broad-based rather than concentrated in a handful of names. European shares also recovered as natural-gas prices eased and investors grew less concerned about another immediate inflation shock.
In many ways, this week’s market story was one of resilience coming at a cost. Economic growth remains solid, but so too do the forces keeping inflation high. Rising energy prices, higher government borrowing costs and robust economic activity all point to a path where interest rates may stay higher for longer than investors had hoped. Until one of those narratives breaks, investors are likely to remain sensitive to every economic release, central bank comment and geopolitical headline.1
Past performance is not a reliable indicator of future results.
References
- Source of all the data for this article: Aviva Investors and Bloomberg. Data as of 4 September 2026.
