High oil prices, record American diesel costs and hot US inflation data on Friday cemented investor fears that the Federal Reserve is all but certain to hike rates soon, despite the potential to dent growth in the world's biggest economy.
After a rollercoaster week for markets, bonds and energy, driven by a sharp escalation in the US-Iran war, US consumer inflation was unchanged at 3.4 percent in August, in line with analyst expectations -- and well above the Fed's two percent target.
It came a day after the European Central Bank raised eurozone borrowing costs, citing the effects on energy costs from a Middle East conflict that has broadened in the past days following an offensive by the Iran-backed Houthis in Yemen.
Cresset Capital Management's Jack Ablin pointed to relief that the inflation figures weren't worse.
"It came in as expected," Ablin said. "Investors are resigned to the fact that the Fed is going to raise rates next week."
Yields on long-term US Treasury bonds remained fairly high, but major Wall Street indices won solid gains after four straight negative sessions.
"It's a little frosting on an otherwise rancid cake," Ablin said.
European stocks also closed higher, with Paris and Frankfurt both finishing up 0.8 percent after a volatile week.
Patrick O'Hare, chief market analyst at Briefing.com, however said that "arguably, the market has already been absorbing the likelihood of a rate hike" through the past week's sell-off.
Any increase would put Fed chairman Kevin Warsh on a collision course with President Donald Trump, who has launched an unprecedented campaign against the Fed's independence, demanding policymakers lower interest rates to spur economic activity.
"With the labor market still resilient and monthly core inflation firming, the Fed will find it harder to avoid a hike next week. Markets are pricing around a 90 percent probability, giving policymakers room to act without catching investors off guard," said eToro US Investment Analyst Bret Kenwell.
While oil prices retreated Friday, they remain at levels deemed far too high by central banks hoping to keep inflation pressures from becoming entrenched in the wider economy -- especially with the Houthis cementing their hold on the Bab Al-Mandab strait, a vital shipping corridor linking Europe and Asia.
Average diesel prices in the United States climbed above $6 a gallon on Friday for the first time, a shock increase for a key fuel in the transport and agriculture sectors -- and a potential headache for Trump ahead of November's midterms.
Brent oil also almost touched $110 per barrel on Friday, its highest level since May, but fell back after the International Energy Agency slashed its forecast for global oil demand this year, citing the recent escalation in the Middle East war and resurgent energy prices.
Asian stocks slumped across the board in the wake of Thursday's heavy selling, with AI and other heavily indebted tech stocks hit as bond yields soared.
- Key figures at around 2015 GMT -
Brent North Sea Crude: DOWN 2.8 percent at $104.61 per barrel
West Texas Intermediate: DOWN 2.4 percent at $100.05 per barrel
New York - Dow: UP 1 percent at 52,561.82 points
New York - S&P 500: UP 1.1 percent at 7,672.09
New York - Nasdaq: UP 1.3 percent at 26,425.54
London - FTSE 100: UP 0.4 percent at 10,650.44 (close)
Paris - CAC 40: UP 0.8 percent at 8,179.77 (close)
Frankfurt - DAX: UP 0.8 percent at 25,568.56 (close)
Tokyo - Nikkei 225: DOWN 1.9 percent at 64,011.34 (close)
Hong Kong - Hang Seng Index: DOWN 0.6 percent at 24,805.63 (close)
Shanghai - Composite: DOWN 1.2 percent at 3,888.11 (close)
Dollar/yen: DOWN at 153.71 yen from 154.42 yen on Thursday
Euro/dollar: DOWN at $1.1596 from $1.1612
Pound/dollar: UP at $1.3527 from $1.3512
Euro/pound: DOWN at 85.73 pence from 85.93 pence
