The Vice
In nine days the world’s three largest central banks raised rates. The US ten year yield passed 5 percent, oil is holding above 100 dollars, and Hormuz has been shut for a seventh month. At the same time the fear index reads 14.8 and the S&P 500 sits near records. One of those two worlds is lying.
🔴 Signal of the week
Three central banks tightened at the same time, and not because the economy is overheating. On September 10 the ECB raised its deposit rate to 2.50 percent. On September 16 the Fed raised to the 3.75 to 4.00 percent range, the first time since July 2023, on a 12 to 0 vote. On September 18 the Bank of Japan raised to 1.25 percent, the highest level since 1995. Nine days, three continents, one direction.
Synchronisation? No, this is a coincidence with a single cause. All three banks are reacting to the same supply shock: the Strait of Hormuz has been closed since the end of February, and on September 11 the East-West pipeline in Saudi Arabia also stopped. Together with the Bab el-Mandeb strait that touches almost forty percent of world trade. The price of energy has become a tax nobody levied and everybody pays. In its own projection the ECB writes that inflation will stay well above target for a long time, and that wages have not even reacted yet.
That is why this is a mechanism rather than a news item. In classic cycle logic a central bank tightens when the economy overheats and eases when it slows. Now it is tightening into a slowing economy, because the alternative is to admit that the cause of inflation is physical rather than monetary, and that its solution is military rather than a matter of interest rates. Michael Howell has been saying for a year that the global liquidity cycle has peaked. Now a number is added that cannot be walked around: more than 8.4 trillion dollars of US government securities have to be refinanced before the end of the year, and money costs 5 percent. Which breaks first, inflation or debt service?
📸 Market snapshot
🔵 Central bank pulse
The Fed: Warsh raises his hand and leaves out his own dot
On September 16 the Fed raised its policy rate by 25 basis points to the 3.75 to 4.00 percent range. The vote was unanimous, 12 to 0. It is the first hike since July 2023 and the first move after five meetings of silence this year. What matters is not the decision but the dot plot: of the 18 participants, 16 expect another hike, and four of them see two. Twelve see year end a quarter of a percentage point above the current level.
Kevin Warsh has not put his own dot on the chart since the day he took the job. That is not modesty. A chair who does not tie himself to a number keeps the right to turn in any direction, and his colleagues’ dots become his bargaining position against the White House. At the press conference he spoke of labour market data, private sector profits and capital investment as signs of strength, and promised the committee would secure price stability. Translation: if we have to, we will raise again, and you will not like it.
The ECB: a second hike in three months
On September 10 the ECB raised its deposit rate from 2.25 to 2.50 percent and the main refinancing rate to 2.65. It is the second hike this year after June 11. The bank’s 2026 projection stays at 3.0 percent inflation, but the 2027 and 2028 numbers were raised to 2.5 and 2.1. Inflation excluding energy and food is even higher next year than this year, 2.6 against 2.5 percent. That means the energy shock has already soaked into the structure of prices.
Lagarde called the decision self-evident and stressed that risks to growth point down while risks to inflation point up. That is the definition of stagflation, said without the word. On the bank’s assessment wages have not yet reacted to the energy shock, so this is still a supply episode rather than a wage-price spiral. For now.
The Bank of Japan: a 31 year high, and the yen falls
On September 18 the Bank of Japan raised its rate to 1.25 percent. That is the highest level since 1995 and the shortest gap between hikes since large scale stimulus ended in March 2024. The board split 7 to 2, with Toichiro Asada and Ayano Sato against. The bank openly named the risk that inflation deviates upward from the 2 percent target.
And yet the yen did not strengthen after the decision, it weakened. The dollar against the yen went back above 157. The reason is simple: two dissenting board members plus Ueda declining to promise further hikes sounded to the market like the last hike of this cycle. When you raise rates and your currency falls, the market is saying your tightening is insufficient, not because it is timid but because it is late.
What it means together
Three banks are draining liquidity at once from a system facing the largest refinancing wave in a generation over the coming years. Howell dates it to 2026 through 2029. US debt is already above 40 trillion dollars, and 8.4 trillion has to be rolled over before the end of this year alone. Every extra basis point here is not an abstraction, it is a budget line. While the Fed raises rates with one hand, the Treasury with the other has since September 9 doubled the limits on long bond buybacks to at least 4 billion dollars per operation. One hand tightens, the other loosens. That is not policy inconsistency. That is fiscal dominance.
🟠 Geopolitical panorama
🛢️ Middle East / Energy
Hormuz has been closed since the end of February, and nothing changed for the better this week. On September 13 the United Kingdom’s maritime security agency reported an unidentified projectile hitting a ship in the strait. On Thursday only four commercial vessels passed through, and those cargoes were bought mostly by Chinese and South Korean refiners. Saudi Arabia is now transferring oil ship to ship near the Omani port of Sohar, outside the strait, to avoid the risk of Iranian attack. On September 11 the East-West pipeline, which had been the main way around, stopped.
There are no negotiations. An Iranian official this week flatly denied that talks with Washington are under way, although Iran and the Gulf states are preparing to sign an agreement in Muscat on an Iranian and Omani shipping corridor. The structural conclusion matters more than the news: the world’s hegemon has the largest navy in the region and still cannot open the strait. The power to close and the power to open are two different things, and this year has shown the second is more expensive.
🇺🇦 Ukraine
At the front the situation is steadily bad. Moscow controls practically all of Luhansk region, Ukraine still holds about 19 percent of Donetsk region, and the fighting concentrates in the east while missile and drone strikes keep falling on civilian targets. But the diplomatic background has moved. On September 12 Reuters reported that Kyiv officials are preparing for possible trilateral talks with Russia and the United States in October. On September 14 Zelensky said Ukraine would support such a step if Washington guaranteed that Moscow would keep to an agreement. That is not optimism, it is a condition nobody has met so far.
The economic picture is grimmer. In July the UN and its partners published a separate winter plan for 2026 and 2027, asking for 358.4 million dollars for 2.1 million people. More than ten million people need humanitarian aid, and civilian casualties this year are well above last year’s. When talks about territory stall, the war moves into the field of winter infrastructure, where whoever has more transformers and gas wins. Energy at 100 dollars works both ways here: for Russia it is revenue, for Ukraine’s backers it is a hole in the budget.
🇨🇳 China / United States
On September 24 Trump receives Xi Jinping at the White House. It is their third meeting in under a year and Xi’s first state visit to Washington in more than a decade. On the agenda are a trade truce, critical raw materials, technology controls, artificial intelligence and Taiwan. Beijing warned through diplomatic channels that it would cancel the meeting if Washington approved a 14 billion dollar arms package for Taiwan before the arrival.
During preparations a US and China trade council was formalised for negotiations on lowering tariffs on non-strategic goods. At the same time, new Section 301 tariffs have applied since July 24 to 60 countries over gaps in forced labour controls, and China drew a higher rate of 12.5 percent. Translated into the language of the cycle: the negotiations are about details, while structural decoupling continues regardless of who hosts whom for dinner.
🇷🇺 Russia / sanctions
The shadow fleet is no longer hidden. The EU list already runs to about 640 vessels, and the combined number of ships sanctioned by the United States, the United Kingdom and the EU has grown from zero in July 2024 to 178. Even so, Baltic ports hit an all time oil export record in January at 12.7 million tonnes. In response to more frequent inspections, Russia has begun escorting shadow tankers with warships through the Channel and the Baltic. On September 15 a Russian frigate fired signal flares at a Danish helicopter. Sanctions work not as a wall but as a tax.
🇪🇺 Europe politically
Germany is being shaken by a crisis of government. In the Saxony-Anhalt election on September 6 the Alternative for Germany took 43.8 percent of the list vote, the best result of any party in that state since reunification, while the Christian Democrats fell to 17.2 percent. In mid-September an INSA poll for Bild showed that 14 percent of respondents consider Merz a suitable chancellor and 78 percent unsuitable. In France parliamentarians failed to agree the 2026 budget in joint committee, so the government is again reaching for emergency legislation to extend last year’s budget.
Brussels’s answer to the energy shock is called AccelerateEU and was announced in April. It provides a temporary state aid framework for affected sectors until December 31, an extension of the national derogation for energy security to 2028, and a new fuel monitoring centre. The number that explains everything: in the first seventeen days of the Iran crisis alone the EU spent an extra 6 billion euros on fossil fuels. When the Union’s two largest states are shaken by crises of government and budget, and the budget is being wrecked by an energy bill, a political crisis is an energy crisis under another name.
🌍 Other: OPEC+ and spare capacity
This year the cartel has quietly shifted its focus from quotas to capacity: from January to September it is assessing maximum sustainable production for the 2027 baseline levels. Saudi Arabia holds capacity at 12.2 million barrels a day, with spare capacity around 2 million. Seven countries have added 188 thousand barrels a day since August. The numbers sound reassuring until you remember that spare capacity is meaningless if the oil cannot sail.
🇱🇹 Lithuania and the Baltics
- A drone carrying explosives was shot down over Lithuania. On the night of September 15 an unmanned aircraft that flew in from Belarus was shot down by Italian fighters on NATO air policing duty near the village of Pratkūnai in Kaišiadorys district, about 90 kilometres north-west of Vilnius. A Ukrainian military source identified features of the Russian Geran-2 design in the wreckage. The key detail is the explosive: until now drones entering Baltic airspace had mostly strayed off course, and a payload changes the nature of the event from an incident into a test.
- The second highest inflation in the EU. In August harmonised annual inflation in Lithuania reached 5.6 percent, with an average annual rate of 4.3. Almost half of the whole annual rise in prices came from energy and transport: heating, petrol, diesel. That is not a local problem, it is Hormuz arriving at a filling station in Ukmergė.
- Electricity prices are not retreating. In August the average wholesale electricity price was about 80 euros per megawatt-hour, almost 6 percent above July. Suppliers promised no decline for September: consumption is rising and solar output is falling. Winter bills will be a political question, not a domestic one.
- 4.79 billion euros for defence, or 5.38 percent of GDP. That is 43 percent more than in 2025 and the second highest figure in NATO after the United States. About 60 percent of the ministry’s budget goes to modernisation, with 1.7 billion euros for weapons: 375 million for tracked infantry fighting vehicles, about 350 million for tanks, 100 million for CAESAR howitzers and about 70 million for HIMARS systems. The US Congress allocated 200 million dollars to the Baltic Security Initiative for the 2026 fiscal year across the three countries.
- Ruginienė’s ministry and the Sodra dispute. The prime minister rejected president Nausėda’s proposal to direct the Sodra surplus into additional pension indexation rather than a reserve, saying it is not needed now. The argument is technical only at first glance: when inflation is 5.6 percent and defence eats 14 percent of all budget spending, every surplus becomes a political field.
- The Baltic Sea is becoming a grey zone. Warship escorts for the Russian shadow fleet, a frigate’s signal flares at a Danish helicopter, drones over the Baltic states. Linas Kojala describes the pattern precisely: our resilience is being tested. His position on what Lithuania can do is equally free of illusions: we will not change the direction of world politics, but we must do our own homework under Article 3 of the NATO treaty.
🌡️ Chart thermometer
Base case: the ten year yield holds in the 4.90 to 5.20 range, the dollar tests resistance at 101.8 to 102.0, gold swings in a 4,250 to 4,600 band, and oil stays above 95 dollars while Hormuz is shut. For equities that means a slow advance on an ever narrower front rather than a collapse: while the fear index is below 17, there is mechanically no selling pressure.
What to watch as the switch: if the yield breaks 5.25 percent while the fear index rises above 20 at the same time, a synchronised selloff in equities and bonds becomes the base case. For bitcoin the decisive level is 82,500: above it the path runs to 85 to 88 thousand, below 75 thousand the 73,000 zone opens.
What would refute this forecast: the opening of Hormuz, or a credible resumption of Iranian and US talks. Oil below 85 dollars within two weeks would remove the main argument for all three central banks, and the whole tightening construction would collapse in a single meeting. The second refutation is milder: a fall in gold below 4,136 would show that the market does believe in disinflation after all.
🗣️ What the voices say this week
🟣 Where they disagree
This week’s argument has a precise address: whether the Treasury’s plumbing can offset the central banks’ pump.
The first camp, Hayes and Pal. For them what matters is not what the Fed does but how many dollars physically move through the system. Since September 9 the Treasury has doubled its long bond buyback limits, the Treasury account at the Fed can be emptied into the market, and the global quantity of broad money keeps growing. If that is true, the rate hikes are theatre and risk assets go on rising.
The second camp, Howell, Gromen, Zeberg and Cowen. For them buybacks are not an injection of liquidity but a swap of duration: the Treasury buys the long end and issues the short end, and the net quantity of money does not change. The refinancing wave of 2026 to 2029 will still demand more than the system produces. Gromen adds: if buybacks really worked, the ten year yield would not be above 5 percent.
The mechanism that separates them. The question is purely technical: are Treasury buybacks a net flow of liquidity, or only a reshuffling of bond maturities. The answer decides whether 2027 looks like 2021 or like 2008.
What settles this argument. A very simple test for the coming month: if buyback volumes rise while the ten year yield falls below 4.85 percent, the first camp is right. If buybacks rise while the yield stays above 5 percent or climbs, the second camp is right, and that will mean the Treasury has lost influence over the price of its own debt. The market will give us the answer without any interviews.
A second, quieter disagreement. A fear index of 14.8 with a bond yield of 5 percent and oil above 100 dollars is a historically unusual combination. Either the equity market is right that supply inflation is temporary, or the bond market is right that money is expensive for a long time. Both cannot be right at once, and a gap like that always closes abruptly.
🟡 Cycle update
The liquidity cycle (Howell): past the peak, in the declining phase. The peak is dated to the fourth quarter of 2025 or early 2026. Ahead lies the refinancing wave of 2026 to 2029, whose first beat is already sounding: 8.4 trillion dollars of US paper turns over before year end.
The recession model (Zeberg): awaiting a final explosive advance. Technically the picture suits him: the S&P 500 near records, the fear index at 14.8, realised volatility at 9.5. All that is missing is a signal for the start of the downturn, and a candidate appeared this week, the 5 percent line in bonds.
The hegemonic cycle: L2, the hegemon’s instruments. This week’s evidence is not even interest rates, it is Hormuz. Seven months of a closed strait, with the world’s largest navy stationed in the region, shows that the power of coercion and the power to maintain order have parted ways. The second piece of evidence is in the reserves: central banks bought 289 tonnes of gold in the second quarter, a record for that quarter, and in the World Gold Council’s June survey 45 percent of respondents said they would increase holdings further within a year.
The bitcoin cycle: 80 thousand, well below the peak, with no regulatory catalyst after the Senate vote. This cycle is no longer about adoption among consumers, it is about liquidity. That makes the bitcoin chart more useful now as a gauge of dollar liquidity than as an investment.
The debt wall: US debt above 40 trillion dollars, with the annual refinancing queue priced at about 5 percent. Every month the Fed holds rates high while the Treasury reprices the debt shifts part of the burden from the market to the budget. Fiscal dominance is not a forecast, it is already an accounting fact.
👁️ To watch next week
- September 24, the Trump and Xi meeting at the White House. What matters is not the joint communiqué but whether the 14 billion dollar arms package for Taiwan is approved before or after the visit. The order will show who conceded to whom.
- September 26, the US personal consumption expenditures price index (PCE). The Fed’s favourite measure of inflation after the first hike in three years. If the energy effect is already visible in the core, the odds of an October hike jump, and the 5 percent line in bonds stops being a line.
- September 23, the preliminary purchasing managers’ indices (PMI) for the United States and the eurozone. The first clean measurement of whether 100 dollar oil is already eating into manufacturing orders. The eurozone number matters more here, because the ECB is raising rates into a weaker economy than the Americans.
- Hormuz and the Muscat agreement. Signing the Iranian and Omani shipping corridor would be the first working way around in seven months. If it moves volumes, the oil premium will start receding faster than central banks expect.
- Treasury buyback volumes and the ten year yield together. That is the week’s argument tested live. If both numbers rise at once, it will mean the Treasury has lost influence over the price of its debt.
- The state of Germany’s governing coalition. After the Saxony-Anhalt result and 78 percent distrust of Merz, the question is no longer about ratings but about whether the coalition survives the budget debate. Germany’s internal crisis is also a question of EU defence financing.
- Baltic airspace. After the explosive of September 15 over Kaišiadorys district, what matters is whether that was a single case or a new frequency. A second similar incident within a month would already raise the question of Article 4 of the NATO treaty.