The US bond market exerted significant pressure on Wall Street on Wednesday, following a surprisingly strong report on the economy that raised concerns about inflation. This led to a decline in US stocks, with the S&P 500 sliding 0.7% after finishing the prior day just 0.4% below its record set last month. The Dow Jones industrial average was down 299 points, or 0.6%, while the Nasdaq composite was down 1.1% from its own all-time high.
The yield on the 10-year treasury jumped to 5.12% from 4.96% late Tuesday, a considerable move for the bond market. High yields undercut prices for stocks and other investments, while also slowing the economy by making it more expensive for everyone to borrow money. This jump sent the 10-year yield back to where it was in 2007, before the global financial crisis caused yields to crater.
The strong economic report suggested growth in US business activity surged to its strongest level in more than five years, which is an encouraging signal but also indicates the economy may have plenty of fuel for more inflation. The report also suggested costs for businesses are leaping at the fastest rate in four years, in part because of more expensive oil, according to Chris Williamson, chief business economist at S&P Global Market Intelligence.
Oil prices have been a significant factor in the inflation concerns, with the price for a barrel of Brent oil to be delivered in November rising 3.5% to $102.78 after climbing as high as $103.12 earlier on Wednesday. This reversed a decline for Brent, which had been falling since it neared $110 last week. Talks are continuing with mediators between US and Iranian officials, but nothing concrete has come from it yet.
The Federal Reserve raised its short-term interest rate last week for the first time in three years in hopes of slowing down increases for the cost of living. Fed governor Michael Barr said in a speech on Wednesday that “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion”. Traders now see better than a 50% probability that the Fed will hike its federal funds rate at each of its next two meetings, in October and December.
Despite the pressure from the bond market and inflation concerns, strong growth in profits for US companies has helped support the US stock market. KB Home became the latest to deliver a stronger profit report for the latest quarter than analysts expected. However, its stock nevertheless swung between losses and gains after the homebuilder’s executive chairman said conditions got even tougher for the industry over the last three months.
In stock markets abroad, indices slipped across much of Europe and Asia. Stock indices fell 1% in Hong Kong and 0.4% in Shanghai ahead of Chinese President Xi Jinping’s state visit to Washington, which is kicking off on Wednesday, and his meeting this week with President Donald Trump. The leaders are expected to attempt to steady fragile ties in their third meeting since Trump returned to the White House.
Key points
- The 10-year treasury yield jumped to 5.12% on Wednesday, a considerable move for the bond market.
- The strong economic report raised concerns about inflation, with growth in US business activity surging to its strongest level in more than five years.
- The Federal Reserve raised its short-term interest rate last week and may hike it further to slow down inflation.
