Mark dowding gas discomfort

• European energy crisis: TTF gas futures have surged above 70, up almost 140% from pre- war levels, with LNG shipping disruptions continuing to drive inflation concerns across the region.

• U.S. monetary outlook: a hawkish Jackson Hole speech has cemented expectations for a September FOMC rate hike, with payrolls data set to make the headlines today.

• Japanese policy shift: recent comments from Governor Ueda make a September BoJ hike appear certain, with further monetary policy normalisation at an accelerated rate expected in the months ahead.

• UK vulnerabilities mount: gilts underperformed this week on the country’s particular exposure to the energy crisis – lacking its own gas storage and bound by the SRMC electricity-pricing formula that ties all power prices to the most expensive fuel source.

• Macro outlook summary: rising borrowing costs pose growing threats to balance sheets, whilst geopolitical tensions and energy prices are shaping the path ahead.

London, 4 September 2026: European yields pushed higher over the last week, as gas price futures continue to rise on fears with respect to shortages in supply. European gas inventory levels have been relatively low from a seasonal point of view, as buyers have delayed purchases in the hope that peace in the Middle East will lower prices.

Yet with the regional conflagration continuing to drag on, these hopes appear to have been dashed. Under the status quo, a number of crude tankers have continued to transit Hormuz, though shipping of LNG remains greatly impaired, given the explosive risk attached to any projectile hitting an LNG carrier.

Consequently, TTF gas futures above 70 represent an increase of almost 140% from pre-war levels, and thus energy costs continue to drive inflation concerns from a European perspective.

The ECB is expected to hike in September and then move again at the end of the year. Thereafter, the path of rates appears more uncertain, and much will hinge on how energy prices continue to drive inflation into 2027.

Should TTF gas futures push towards 100 in the weeks ahead, this will be embedded in much higher energy costs through next spring and, in that scenario, the ECB will likely remain on a hiking path.

However, should prices top out around current levels, the peak in euro inflation should remain below 4% and with base effects on energy prices pulling headline inflation lower by next Easter, this could see the ECB on hold after the New Year.

In this respect, much depends on whether we will find ourselves in the ECB’s ‘adverse’ or ‘severe’ scenario, and events in the Middle East will continue to have a material bearing on this.

However, we would also express confidence that the ECB will seek to ensure that any overshoot in prices is as short-lived as possible.

Indeed, if it is successful in this respect, it would not be at all surprising were the ECB and other European central banks to find themselves reversing course on interest rates later next year.

From this standpoint, we still see value in shorter-dated European yields for the time being, notwithstanding risks related to gas prices.

U.S. Treasury yields also rose over the week on the back of increased Middle East tensions. From a U.S. perspective, it is oil rather than gas that is the predominant driver of inflation concerns, and in this context, it has been noteworthy how little U.S. natural gas prices have risen in the past year. #

A hawkish speech from Kevn Warsh at Jackson Hole has cemented expectations for a September rate hike from the FOMC and unless there is a disappointing U.S. labour market report later today, then we expect this to be delivered later this month, notwithstanding more dovish comments this week from Chris Waller.

The yield curve has continued to flatten over the past month, with the sense that the administration is eager to do whatever it can to prevent further increases in long-dated borrowing costs.

In this context, it may well be that higher short-term interest rates help to underpin bond market confidence further out the curve, at a time when bond yields in the U.S. (and globally) are at multi-decade highs.

We continue to have no strong directional view on Treasuries or the…