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[Energy Shock Overestimated, Bond and Currency Markets May Overreact] ⑴ Current market concerns about inflation may be exaggerated because the current energy price increase is relatively limited compared to the early stages of the Russia-Ukraine conflict in 2022. ⑵ European natural gas prices surged approximately tenfold back then, while this year they have only doubled; US crude oil once reached $130 per barrel, and natural gas broke through $10, but are now around $3 each. ⑶ Even so, the US inflation rate at that time only rose from nearly 8% to about 9%, while this year's US inflation has already exceeded that of 2022, yet the energy price shock has been much smaller. ⑷ The 2022 war took place in a major grain-producing region, while the current Middle East situation does not have this factor, so the reasons for pushing up inflation then were actually more compelling than they are now. ⑸ However, the market reaction has been quite the opposite, with bonds experiencing a large-scale sell-off this year, and yields rising to levels not seen in many years, reflecting a significant increase in concerns about energy-driven inflation. (6) In 2022, the bond market was still digesting the positions accumulated during the years of ultra-low interest rates, and has since shifted to a large number of short positions, which may help limit further declines in bond prices. (7) If the US economy could withstand a larger energy price shock when the bond market was far less prepared than it is today, then current positioning in the currency market may also be excessive. (8) Traders bought the US dollar and energy-exporting currencies while selling energy-importing currencies, especially emerging market currencies. The Indian rupee, Indonesian rupiah, Philippine peso, Turkish lira, and trade-weighted Japanese yen all fell to historic lows. (9) Market sentiment seems to linearly extrapolate the energy shock to sustained inflation, but historical experience shows that the transmission effect of price shocks is often weaker than expected. (10) Going forward, attention should be paid to whether energy prices can remain high and whether there is short covering in the bond market, which could be the trigger for a correction in currency sentiment.