On Monday (October 5), the energy shock is evolving into a growth shock. Recent views from major overseas institutions indicate that the conflict with Iran has reached a dangerous stalemate, two oil tankers in the Strait of Hormuz have been attacked again, and three US carrier strike groups are gathering in the Middle East. US non-farm payrolls increased by only 29,000 in September, the 10-year US Treasury yield fell briefly on Friday, and gasoline prices approached $4.40. The bond market is at a critical turning point between inflationary shocks and slowing growth. This week's data releases are less frequent, with the ISM Services PMI becoming the focus.

Escalating tensions: A dangerous window of opportunity in a lose-lose stalemate

The conflict with Iran is sliding into deeper uncertainty. Major international institutions assess that both sides are willing to reach an agreement, but their positions are increasingly diverging. On the Iranian side, a currency collapse, a devastating oil tanker load, and the resignation of the oil minister are eroding Iran's control over the Strait of Hormuz. On the US side, following the high-level meeting at Camp David over the weekend, three carrier strike groups may be deployed to the Middle East simultaneously. The US has stated that it has left Iran with two options: an "easy path" and a "difficult path," while hardline voices are betting that their adversary cannot sustain the conflict. Two more oil tankers were attacked near the Strait on Sunday. It is worth noting that before the conflict, the oil market had ample inventory and spare capacity as a safety net; now, both are exhausted, and every day of delay adds to the economic cost. The probability of reaching an agreement before the November 3rd midterm elections is generally considered low; the market will truly price in the expectation of a "high probability of escalation" after the elections.

US Treasury bonds: The second half of the inflation shock is a growth tax.

The bond market is currently caught in a tug-of-war between two forces. In the first half, rising energy prices pushed up inflation expectations, and yields repeatedly hit record highs. However, mainstream overseas institutions have noticed signs of a turning point: September's non-farm payrolls were only 29,000, the 10-year yield briefly dipped on Friday, the savings rate fell to 4.1%, consumer debt hit a record high, and the model of American households relying on overspending and borrowing to cover energy bills is nearing its limit. Gasoline is around $4.38, diesel around $6.36, and electricity prices are rising faster than inflation—this "consumption tax," if it continues for a year, will substantially shrink discretionary spending. At that time, inflation will fall, the interest rate hike path will collapse, and a significant downward revision of yields will be even more powerful. The core reasoning of this institution is: the longer high oil prices and high yields persist, the more dramatic the eventual reversal will be. This is the most crucial layer of logic for understanding the current bond market.

US Stocks and Risk Sentiment: Cracks Beneath the AI Halo

The apparent resilience of the stock market can be deceptive. Major overseas institutions point out that while the AI sector has supported the index, many constituent stocks have fallen below their 50-day, 100-day, and 200-day moving averages, indicating that weakness within the index has already spread. Record bond yields and expensive energy and electricity prices will ultimately be transmitted to the AI sector itself through three channels: rising discount rates, increased infrastructure financing costs, and weakening end-user demand. Friday's disappointing employment data may be an early sign of this transmission. For traders, this means that the apparent stability of risk appetite could be disproven by data at any time.

Gold and Crude Oil: A Clash Between Safe-Haven Logic and Supply Vulnerability

The fundamentals of crude oil have no room for deterioration. The oil market was fully stockpiled before the war, leaving no buffer during the war. Supply losses are already close to 3 billion barrels, and commercial inventories have fallen below warning levels. Any new attack will be amplified in pricing. However, it's also important to recognize that each surge in oil prices accelerates the process of the "energy shock turning into a growth shock," which in turn suppresses demand expectations—this is the self-restraint of crude oil's upward movement. The logic for gold is smoother: geopolitical stalemates provide a safe-haven asset, while weak non-farm payroll data adds fuel to the narrative of a "collapsed interest rate path," and pressure on real yields is a continuous positive for gold prices. If this week's services sector data confirms a slowdown in growth, the logic for precious metals will be reaffirmed.

This Week's Focus: Three Things That Happened During the Week as Data Cools Down

This week's schedule is noticeably lighter, with no speeches from Federal Reserve officials. Monday kicks off with two major data releases: the revised S&P Services PMI and the ISM Services PMI. The market expected the latter to slightly decline from 55.4 to 55.2, still considered strong, but the input price component in the preliminary reading has surged to its highest level since October 2022—cost pressures have not eased. There will also be an auction of over $170 billion in short-term Treasury bills. Beyond the data, the frequency of tanker attacks, aircraft carrier movements, and the Iranian currency's performance are all variables that could be even more sensitive than the data itself.

Trend Outlook

In the short term, risk premiums dominated this week: any developments in the Middle East will be immediately priced into crude oil and gold, while US Treasury yields are fluctuating at high levels but upward momentum is weakening. In the medium term, the frameworks of major overseas institutions are worth monitoring and verifying—if employment and consumption data continue to weaken in the coming weeks, the narrative of "energy shock turning into growth shock" will strengthen, upward pressure on interest rates will ease, and precious metals will benefit from declining real yields; crude oil, on the other hand, may be caught in a wide tug-of-war between "geopolitical inflation" and "demand suppression." The risk lies in the post-election escalation scenario: if a more severe military strike or a complete blockade of the Straits occurs, the aforementioned growth logic will be overridden by inflation logic, and market volatility will amplify again.

Further Reading

Q: Why is the energy shock turning into a growth shock? A: Initially, price increases pushed up inflation, but household savings rates have fallen to 4.1% and debt is at a record high, making it unsustainable to absorb energy bills through overspending. Once spending contracts, inflation will reverse into slower growth, which is the core basis for the judgment by mainstream overseas institutions that yields have peaked. Q: Why is the non-farm payrolls increase of only 29,000 significant? A: It is the first hard data signal that energy consumption taxes are beginning to erode the job market, directly shaking the market's previous aggressive pricing of interest rate hikes and leaving room for the Fed to return to the September dot plot path. Q: What is the biggest difference between the oil market before and now? A: Before the oil market was backed by full inventories and ample spare capacity; now both are lost. Supply losses are nearly 3 billion barrels, commercial inventories have fallen below 6 billion barrels, and the market's sensitivity to any supply disruptions has been magnified many times over. Q: Why can't the AI sector escape the energy price increase? A: Discount rates rise with bond yields, data center power consumption drives up costs, infrastructure financing becomes more expensive, and end-user demand weakens with the economy. AI supporting the index is superficial; cracks have already spread within the index itself. Q: What should we be focusing on this week? A: The price sub-index of the ISM Services PMI confirms cost pressures, the frequency of tanker attacks confirms geopolitical dynamics, and the results of the US short-term debt auction confirm market resilience. The intersection of these three factors will help determine whether this "decision week" is heading towards a "decision month."