Soaring oil prices intensify inflation pressure: Asian stocks and bonds plunge, Nikkei tumbles nearly 3%, US 10-year Treasury yield nears 5%

The dual impact of rising oil prices and inflationary pressures triggered a massive sell-off of risk assets in the Asian markets on Friday, with both stocks and bonds declining simultaneously. Investors are anxiously awaiting the US August inflation data to be released later that day, a report that will largely determine the Federal Reserve's interest rate decision this month.

The MSCI Asia Pacific Index fell by 1.7%, marking its largest single-day drop in three weeks. The Nikkei 225 Index slumped as much as 2.8% during the morning session, while India's Nifty Index dropped about 1%. Meanwhile, Asian government bonds tracked US Treasury losses; Australia’s three-year government bond yield jumped as much as 20 basis points in a single day to 5.05%, and New Zealand’s two-year yield rose by 25 basis points. The yield on the US 10-year Treasury hovers around 4.96%, just shy of the 5% threshold.

Market participants generally maintain a cautious stance. Mohit Mirpuri, a partner at Singapore's SGMC Capital, stated: "Asian markets are experiencing a full-scale flight to safety. The sustained decline in bonds and the US 10-year yield approaching 5% are naturally suppressing risk assets. With the US CPI data due out today, it’s understandable that investors are reluctant to take on excessive risk."

• As of the morning close, the Nikkei 225 Index fell 2.8%, the TOPIX declined 1.1%, and India's Nifty Index dropped 1%.
• The US 10-year Treasury yield hovered around 4.96%.
• Japan's 10-year government bond yield rose by 8 basis points, to 2.980%.
• Brent crude oil rose by 0.2% on Friday to $107.86 a barrel, briefly approaching $110 during the morning session.
• Spot gold increased by 0.2% to $4,327.21 per ounce.
• bitcoin dropped 0.2% to $77,077.17.

The US Treasury market came under renewed pressure on Thursday, sparking the latest wave of declines across Asian markets. In the first expanded-scale Treasury buyback operation by Treasury Secretary Scott Bessent, the actual repurchase volume for 10- to 20-year securities fell short of investors' expectations, leading to a broad sell-off in US Treasuries, with the 10-year yield up a total of 19 basis points this week.

Padhraic Garvey, Head of Americas Research at ING Groep NV, bluntly stated: "The US 10-year Treasury yield reaching 5% looks more like an inevitability than a forecast. This is a worrying moment for the bond market."

Current pricing in the interest rate swaps market shows about a 70% chance of a Federal Reserve rate hike next week, and a full pricing in of a hike in October. Bloomberg Economics estimates that, owing to the rebound in gasoline prices, the year-on-year growth in headline CPI for August will accelerate, while core CPI growth will likely remain unchanged from July.

The US Producer Price Index (PPI) for August, released on Thursday, showed that rising energy prices have once again heightened inflationary pressures, which further supported the case for the Federal Reserve to take action at its September 15-16 meeting. Fed Governor Christopher Waller has previously made it clear that the September decision will hinge on whether inflation cools.

Joe Brusuelas, Chief Economist at RSM US LLP, pointed out: "Red-hot PPI data, combined with the hawkish signals from ECB President Christine Lagarde, highlights a reality: a new cycle of global central bank rate hikes may be brewing. This bodes ill for risk assets, both currently and in the short term."

ECB President Lagarde also warned on Thursday that inflation risks in the region would persist through 2027 and that downside risks to eurozone growth can't be ignored, further intensifying market concerns of global monetary policy tightening.

Bloomberg Markets Live strategist Mark Cranfield noted that the current pace of rising bond yields brings to mind historical scenarios in which global stocks suffered sharp declines—on both previous major sell-offs in the MSCI global index, surging US yields played a central role.

Geopolitical risk is another significant driver of the current market turmoil. Brent crude oil added 0.2% on Friday to $107.86 a barrel, briefly approaching $110 in early trade. Continued tensions around the Strait of Hormuz, with a rising number of attacks on vessels transiting the waterway, have pushed up prices for oil, natural gas, and diesel, intensifying concerns about higher energy costs feeding into broader inflation.

According to reports, Iran-backed Houthi forces are advancing along the coastline near the Palestinian strait, attempting to seize Mokha Port in the southern Red Sea.

Warren Patterson, Head of Commodities Strategy at ING Groep NV, commented: "Rising oil prices will attract attention ahead of the mid-term elections. For there to be a much steeper rise, there would need to be a substantive escalation that actually disrupts oil flows through the Strait of Hormuz."

Against this backdrop, Friday’s US CPI report is seen as a crucial litmus test to assess whether the rise in energy prices has begun to feed into broader price pressures. The report not only influences the direction of the Federal Reserve’s decision this month, but will also largely determine the duration and depth of the current adjustment in global risk assets.