Happy Monday. Long-term bond yields are climbing and the dollar is advancing as a rebound in global energy prices raises the stakes ahead of central bank decisions later this week. Brent crude is trading for nearly $108 a barrel after Houthi militants seized a Red Sea port, threatening oil shipments through the Bab el-Mandeb strait, and drones struck at least two pumping stations on Saudi Arabia’s East-West pipeline, forcing a system-wide shutdown. Equity futures are pointing to losses at the open after US artificial intelligence companies led by OpenAI argued that development should be slowed to allow a better understanding of the risks posed by superintelligent systems.

The Canadian dollar is paring its losses after underlying inflation pressures remained unchanged last month, leaving the odds on a rate hike from the Bank of Canada by year end effectively unmoved. Data released by Statistics Canada this morning showed core inflation—which strips out food and energy prices—and is computed as the average of the two price measures now preferred by the central bank (trim and median)—rising 1.95% in August from a year earlier, the same as in the previous month. On a headline all-items basis, prices fell -0.1% from July, climbing 3% from the same period last year, also matching the prior month. This came after the Bank of Canada sounded less dovish than expected in its early-September policy meeting, leading market participants to price at least one move before year end—something we view as too aggressive, given persistent economic weakness, continued uncertainty, and limited evidence of price spillovers. At present, the Bank of Canada is meeting its inflation target, implying that there’s no pressing need for tighter policy.

Ten-year Treasury yields are sitting just below 5% ahead of Wednesday’s widely expected rate hike from the Federal Reserve. Thursday’s strong producer-price figures and Friday’s hotter-than-expected core consumer-price reading have firmed forecasts for the core personal-consumption-expenditures index, the Fed’s preferred inflation gauge, with most economists expecting it to remain well above target when it is updated at the end of the month. And after Kevin Warsh, at Jackson Hole in late August, warned that too little progress had been made in bringing inflation down, traders are now putting the odds on a move this week at nearly 90%.

Yields could—counter-intuitively—retreat if the Fed’s message is rigorous enough. A quarter-point hike, paired with an upgrade in the “dot plot” summary of economic projections, and followed by a hawkish message from Chair Warsh, could bolster the central bank’s inflation-fighting credibility—tamping down inflation expectations, fiscal dominance concerns, and long-term yields.

Although the Bank of England is expected to stay on hold in Thursday’s decision, communication risks are tilted to the upside. Recent data have shown the economy holding up relatively well, with household consumption and business investment proving more resilient than had been expected, and tomorrow’s employment update could reinforce that impression. Rising natural-gas prices, meanwhile, are pushing inflation towards the “adverse” scenario the Bank set out in July. Traders expect a repeat of that month’s 6-3 split, with six members of the rate-setting committee voting for no change and three for a quarter-point rise. Such an outcome might soften the pound; while more support for a hike—or a hawkish warning from Governor Bailey—could see it regain some strength.

The Bank of Japan, by contrast, looks set to raise rates to a 31-year high later this week, with markets exposed to a gradual normalisation message from Governor Kazuo Ueda. Rate curves have repriced sharply higher in recent months, but Japan’s inflation is coming mainly from imported food and energy that cannot be addressed through monetary policy changes; wage growth remains weak; and the wider economy is struggling to gain momentum. The yen has rallied this month—mostly, we think, on expectations that the giant Government Pension Investment Fund is about to increase allocations to domestic markets—but it could begin to give up those gains if the Bank’s message, or the Fund’s investment plans, disappoint.

Bottom line: Without a breakthrough in the Middle East, stress levels look set to intensify across asset classes in the weeks ahead, forcing a hawkish shift in central bank communications, lifting measures of implied volatility, and generating turbulence in currency markets. Failing another shock to US policy credibility, the dollar should remain well-supported against this backdrop.