When the summer began, Tehran and Washington had agreed on a memorandum of understanding, the Strait of Hormuz was set to reopen, and oil prices were falling rapidly.

Fast forward to the second week of September, and that optimism is gone. The U.S. reported destroying five Iranian oil tankers on Tuesday, and Iran's Revolutionary Guards responded by firing ballistic missiles at a base in Jordan, as well as attacking 10 ships near the Strait of Hormuz, including two U.S. vessels.

Perhaps most worryingly, the Iran-aligned Houthis, who attacked Saudi cities earlier in the week, seized control of Yemen's port city of Mocha on Thursday and advanced down the Red Sea coast to strategic islands. This threatens the Bab el-Mandeb Strait, another key shipping route that Saudi Arabia has relied on to export oil since the effective closure of Hormuz in February.

Amid this backdrop, global oil prices, which had been inching up for weeks, finally broke through the psychologically important $100/bbl level on Wednesday, with Brent settling up 6% on Thursday at nearly $108/bbl, before paring some of these gains early on Friday.

The spike in energy prices raised inflation fears and rate-hike expectations, pushing up already-elevated government borrowing costs across developed markets. The benchmark 10-year U.S. Treasury yield hit its highest level since 2023, rising above 4.9% on Thursday, while the 30-year yield reached a nearly two-decade high above 5.38% and the 2-year yield jumped to almost 4.6%, its highest point in 14 months.

The bond ructions in the U.S. also reflected investors' disappointment with the limited size of Treasury Secretary Scott Bessent's plan to buy back longer-dated bonds, details of which were announced on Wednesday.

The energy market's current dynamics may keep the bond market on edge for some time, as today's elevated oil prices reflect more than just supply-and-demand fundamentals, which are rather murky. Traders, energy companies and government officials all still disagreeabout exactly how much oil is exiting the Gulf.

This supply uncertainty, coupled with fear about the potential duration of the conflict, appears to be creating a residual risk premium – one that could remain deeply entrenched in energy prices for months.

Or perhaps years. The Wall Street Journal reported on Wednesday that top White House advisers, including Vice President JD Vance and Secretary of State Marco Rubio, have privately warned Trump that the conflict could outlast his presidency, which ends in January 2029.

The U.S. president, however, said earlier on Wednesday that he expected the war with Iran to end after the November U.S. midterm elections, though Tehran has shown little willingness to return to the negotiating table, despite the strain being caused by America's blockade of the Strait and tightened economic sanctions.

Speaking of the midterms, the Republican Party's first-ever midterm convention kicked off on Wednesday, with President Trump proposing to pay every U.S. adult a $5,000 "Trump dividend" if his party holds both the Senate and the House in November's congressional elections.

That would likely cost more than $1 trillion – an enormous fiscal stimulus at a time when the economy is arguably running hot. Markets didn't respond, however, given that the "dividend" would likely require congressional approval and could raise legal challenges.

Moving to a different set of elections, the Alternative for Germany (AfD) came in first place in state elections in Saxony-Anhalt on Sunday, putting a far-right party within reach of power at the state level in the country for the first time since World War Two. While the AfD did not secure an outright majority and thus might not actually govern, the outcome is significant nonetheless, as it underscores the rising popularity of non-mainstream parties throughout Europe. This could have major economic implications if today's governments respond by pursuing more populist policies.

Jumping back across the pond, the U.S. on Tuesday announced import bans – taking effect on September 29 – on a broad range of Canadian products, including alcoholic beverages, motorcycles and dairy products. The announcement came after Canada's own retaliatory tariffs on U.S. goods kicked in. Those levies were a "dollar-for-dollar" response to the 50% tariffs the U.S. imposed on some $20 billion of Canadian goods last month.

Over in FX markets, the yen surged throughout the week, strengthening to as much as 152.89, a seven-month high, on Tuesday. The Japanese currency's recent gains have been driven by bets on a faster pace of monetary tightening by the Bank of Japan and the rising likelihood that Japanese investors may shift some of their massive overseas holdings home.

Treasury Secretary Bessent commented on the Japanese currency on Wednesday in a larger discussion of the use of U.S. financial power as a foreign policy tool. He cautioned investors about the risk of positioning themselves against U.S. interventions. "I am the house now," he said. "And you can bet against me if you want."

Now, we turn to the biggest economic event of the week: the U.S. August CPI release later today. It's shaping up to be one of the most important in months, as it may very well determine whether Kevin Warsh's Fed hikes rates at next week's policy meeting or remains on hold. Fed funds futures traders are pricing in a more than 65% chance of a quarter-point rate increase next week.

Economists polled by Reuters expect monthly headline and core consumer price inflation of 0.4% and 0.2%, respectively, and annual headline and core readings of 3.4% and 2.4%. Producer prices for August, released on Thursday, increased in line with expectations.

Meanwhile, the European Central Bank has already moved, raising its policy rate as expected to 2.50% from 2.25% on Thursday to head off the energy-driven surge in inflation. Whether they're going to be "one and done" remains up for debate. 

But there's a growing set of trends – from trade figures to prices to corporate earnings – that suggest the global economy is running hot. Fiscal policy is unlikely to be used to cool it anywhere, meaning rate hikes in many large economies may be the only available lever left to pull.

It looks like it could be an autumn to remember.