The bond market hiked before the Fed

The 2-year Treasury yield rose 26 basis points this week to 4.63%. The 3-month bill yield rose 16 basis points to 4.07%, already above the top of the Federal Reserve's 3.50%-3.75% funds range. The committee does not vote until Wednesday.

The 10-year TIPS real yield rose 17 basis points to 2.60%, accounting for all but 1 basis point of the nominal 10-year's weekly climb to 4.96%. Ten-year breakeven inflation, the gap between the nominal yield and that real rate, moved 1 basis point to 2.36%. That is a policy-tightening adjustment, not a repricing of long-run inflation.

West Texas Intermediate settled Friday at $100.05 a barrel, 9.4% above the prior week's close of $91.48. A week earlier the jobs report had left the Federal Reserve's September 15-16 decision to the inflation data, with oil still under $92.

Producer prices on Thursday had already shown how far the oil move had traveled upstream. Final-demand PPI rose 0.4% in August and 5.4% over 12 months. Goods prices rose 1.1%, more than three-quarters of that from energy, which jumped 4.2%. Diesel fuel alone rose 24.1% and accounted for more than a third of the goods increase, the BLS said. Prices excluding food, energy and trade services rose 0.3% in August after 0.4% in July, and 4.7% on the year. Prices excluding food and energy rose 0.2% on the month. Energy did the work in the goods indexes. The measures that strip it out slowed.

Gasoline did August's CPI. Shelter helped

Headline inflation was 3.4% over the 12 months through August, the same as July. The energy index rose 2.1% on the month and 16.3% on the year, with gasoline up 3.9% and 27.4% respectively. Gasoline accounted for more than a third of the 0.4% monthly rise in consumer prices the Bureau of Labor Statistics published Friday. Core CPI, which strips food and energy, rose 0.3% after 0.2% in July, and slowed to 2.4% year over year from 2.5%. Shelter rose 0.3% after 0.1%. The print was not a one-line energy shock, and it was not a broad reacceleration either.

Governor Christopher Waller had said the week before that the September vote would turn on whether August inflation stayed on the disinflation path. The year-over-year core rate did. The monthly core rate, the energy complex, and a 2-year yield at 4.63% did not make that an easy look-through. By the close, Reuters put the chance of a quarter-point increase at next week's meeting at 85%.

Thursday moved the curve. Friday confirmed it

U.S. stock and bond markets were closed Monday for Labor Day. The damage was not evenly spread across the four sessions that followed.

The iShares 20+ Year Treasury Bond ETF BTLT took the week's hit on Thursday, when PPI, the European Central Bank's rate increase, and a 6.7% surge in WTI to $102.48 arrived on the same morning. Friday's CPI took the 10-year yield to 4.96% as crude gave back 2.4%.

The rest of the Treasury curve was a bear flattener. The 5-year yield finished at 4.78%, the 30-year at 5.35%. The 2s10s spread narrowed 8 basis points to 33.

Intermediate Treasuries paid the same bill in a smaller size: the iShares 7-10 Year Treasury Bond ETF BIEF fell 1.3%.

The inflation-linked sleeve did not offset it. The iShares TIPS Bond ETF BTIP fell 1.0%. When the rise in yields is real, TIPS reprice lower with the rest of the bond market. Investment-grade credit followed duration, not a spread panic: the iShares iBoxx $ Investment Grade Corporate Bond ETF ALQD fell 1.1%.

Oil paid. Gold did not. The dollar did not squeeze

The United States Oil Fund BUSO, which holds crude futures, rose 9.1%. Energy stocks did a fraction of that work. The State Street Energy Select Sector SPDR ETF AXLE gained 1.7% and led the sector SPDRs. The S&P 500 still finished the week 0.8% lower, at 7,656.98, after a 0.9% bounce Friday as oil retreated.

Gold sold with real yields. SPDR Gold Shares BGLD fell 2.0%.

That is the week's cleanest cross-asset sentence: an energy shock that lifts crude and a policy shock that lifts real rates will not take gold with them.

The Invesco DB US Dollar Index Bullish Fund CUUP finished unchanged. The euro barely moved with it. The Invesco CurrencyShares Euro Trust BFXE fell 0.1%. The Invesco CurrencyShares Japanese Yen Trust FXY rose 1.7%. MUFG Research said the yen was the week's best-performing G10 currency. A flat dollar index made of a flat euro and a strong yen is not a policy-rate squeeze.

The European Central Bank raised its deposit rate 25 basis points to 2.50% on Thursday, saying the conflict in the Middle East continues to generate inflation pressures.

Freddie Mac's 30-year conforming mortgage rate stood at 6.76% as of Thursday, up 5 basis points from 6.71% the week before. The Federal Reserve announces its decision on Wednesday.