Important U.S. inflation data and a European Central Bank meeting take centre stage this week, against the backdrop of a bond market selloff that has pushed borrowing costs to their highest in years from Tokyo and Sydney to London and New York.
Here's all you need to know about this week in financial markets by Kevin Buckland in Tokyo, Lewis Krauskopf in New York and Yoruk Bahceli, Samuel Indyk and Marc Jones in London.
1/ SHAKEN, BUT NOT YET STIRRED
Bond yields have been surging across regions and maturities, increasing borrowing costs for governments, businesses and households, and challenging lofty stock-market valuations.
There is a combination of drivers. The war in the Middle East has sent energy prices higher, lifted inflation expectations and had traders bracing for more rate hikes, sending shorter-dated yields in the U.S. and euro zone to their highest in a few years.
Meanwhile, 10-year yields are near bigger milestones, while most major 30-year yields are around their highest in well over a decade, as traders fear years of heavy sovereign borrowing are becoming harder to finance.
Governments are watching. Last month, hoping to bring down yields, the U.S. Treasury said it would at least double the size of its buyback operations for longer-dated debt. The first operation is scheduled for Wednesday.
But, while levels are dramatic, moves have been orderly, at least so far.
2/ HERE COMES THE YEN
Japan is at the heart of the global debt story as the yield on its 10-year notes has risen above 3% for the first time in three decades, setting markets abuzz about the potential impact of a mass repatriation of Japanese capital from U.S., European and Australian debt markets.
What investors want to hear is whether Japan's $2 trillion pension fund, the GPIF, will shift more of its capital to domestic bonds, at the expense of stocks and overseas debt.
Government finances are in focus too, with budget requests from Japanese ministries for next fiscal year at pandemic-era levels, while the Bank of Japan could be moving to a faster pace of rate hikes, sending short-term rates surging.
The latter could finally boost the long-embattled Japanese yen. The currency strengthened nearly 3% across Wednesday and Thursday, as sentiment shifted, the sort of move only seen recently when Japanese and U.S. authorities jointly stepped into markets.
3/ PRICE CHECKS
Meanwhile, in the U.S., upcoming inflation reports could be the deciding factor for whether the Federal Reserve raises interest rates later this month.
Data on producer prices are due Thursday, a day before the closely watched consumer price index. Economists polled by Reuters expect August CPI to have climbed 0.4%.
Inflation has run above the Fed's 2% annual target for several years although the prior month CPI showed just a mild rise.
Markets see around a 60% chance of a September rate hike, with arguments in favour coming from new Fed Chair Kevin Warsh's hawkish speech at its Jackson Hole conference, and Friday's much higher-than-expected jobs data.
On the other hand, Fed Governor Christopher Waller said Thursday if upcoming data confirms inflation pressures are cooling, he is inclined to argue for keeping rates steady.
Quarterly results for hyperscaler Oracle next week also could bring renewed focus on the AI trade.
4/ THURSDAY HIKE, THEN WHAT?
The ECB is all but certain to raise rates by another 25 basis points on Thursday - a repeat of June's move.
Policymakers won't be happy to see inflation back above 3% as energy prices rise, so for traders, the question is what happens next.
Rate-setters don't have crystal balls and it's anyone's guess how long the Iran war lasts, so they'll have little appetite to signal what's next.
Markets continue to bet on another move by December and one more next year. But economists reckon the ECB is done for now and the sharp rise in bond yields this summer may have done some of policymakers' work for them.
Also watch what ECB chief Christine Lagarde says about the U.S. selling euros to buy yen.
5/ SENE-GALLING
It's not just the big global bond markets where trouble is brewing. Two years after Senegal discovered what is now known to be over $10 billion of previously unknown debt, the government is bowing to the inevitability of an IMF bailout.
The quid pro quo is that it will have to fix its debt to make it sustainable in the long run. That's not as simple as it sounds though, especially for a country in a monetary union - just ask Athens.
Dakar, therefore, doesn't want to include any of the "local" West African CFA franc debt lent to it by the region's banks and multilaterals. That means the rest of its debt - especially the government bonds it sold on the international capital markets - will need to take a bigger hit.
S&P on Friday cut Senegal's long-term foreign-currency rating to "CC" from "CCC+", citing a high likelihood that the government's planned debt restructuring will result in losses for foreign-currency creditors.
It is likely to take months for it all to become clear, but next week could see an important development. The IMF's board is due to discuss its Debt Sustainability Framework for Low Income Countries, and a change to those rules could make Senegal's situation look even worse. - Reuters
