Good morning. The dollar is sitting near a two-month high after Treasury yields posted their biggest single-day jump since the market convulsions that followed last year’s ‘Liberation Day’ tariff announcements. With the exception of the Swiss franc, every major currency is down almost 1% against the greenback this week.

Investors were wrongfooted yesterday when S&P Global’s purchasing-managers’ index showed US business activity growing at its fastest pace in five years in September. According to the typically-humdrum second-tier release, output across the manufacturing and services sectors hit its highest levels since July 2021. The manufacturing index jumped to 57, its best reading since 2022, new orders grew at the quickest rate since April 2022, and hiring intentions were the strongest since February 2021. Price pressures intensified too: supplier delivery times lengthened by the most since mid-2022, and raw-material costs climbed. Earlier surveys showed activity in the United Kingdom remaining in expansionary territory and the euro area accelerating to 41-month high, suggesting that the advanced economies may now be in the early stages of a cyclical upturn.

Energy prices, meanwhile, are reversing recent declines. Addressing the UN General Assembly yesterday, Iranian President Masoud Pezeshkian said the Islamic Republic would not permit free navigation through the Strait of Hormuz while sanctions and an American blockade remain in place. Iran’s foreign ministry separately said it had presented Washington with conditions for restarting truce talks, including acceptance of a shipping route agreed by Oman and Iran, an end to the naval blockade, and the release of Iran’s frozen assets. Brent crude oil futures are trading for nearly $105 a barrel, up 5% from Monday, while West Texas Intermediate goes for $93.

Bond yields are surging across the advanced economies. With futures traders putting the odds of a quarter-point Federal Reserve hike next month at 71%—up from about 50% a day earlier—ten-year Treasury yields are near their highest levels since the global financial crisis, and 30-year yields are pushing levels last reached in 2004. The gap between French and German borrowing costs is at its widest since Mario Draghi’s “whatever it takes” speech in 2012, and Japanese ten-year yields are nearing 30-year highs.

The Mexican peso is weakening ahead of this afternoon’s rate decision, with markets expecting a third consecutive hold accompanied by neutral messaging. Inflation remains above target, so policy should stay moderately restrictive and cuts are off the table. But the case for tightening is equally flimsy: the economy has ample slack, and government energy subsidies and a strong currency are cushioning it against imported inflation. The peso, like most currencies, is on the back foot amid a hawkish repricing of the Fed’s policy path, but retains an attractive volatility-adjusted carry profile, and Mexico’s relative political stability, its position in the artificial intelligence supply chain, and its still-privileged access to US markets should help it steady in the near term. There’s no sign of the sort of reversal in foreign investment holdings that has accompanied prior instances of sharp peso depreciation.

All bets are off, however, if the current shift in market equilibria turns more damaging. Inflation is running high, the world economy is fragmenting and accelerating at once, central bankers are turning hawkish, the tech sector is competing for capital, and government debt is growing at an unsustainable pace. Conditions could easily revert to some semblance of normality, but the risk factors are in place for a dislocation in global financial markets—and in the carry trade that has propped up valuations in recent years.