Treasury yields jumped to their highest level since 2007 on Wednesday after strong manufacturing data and comments from Fed Governor Michael Barr pushed traders to price in a 71% chance of an October rate hike. Fresh inflation data from S&P Global added to the pressure, and stocks retreated from record highs as yields rose.
Treasury yields shot higher on Wednesday after economic data showed manufacturing activity surprised to the upside, sending a shock through the world's most important bond market. The benchmark 10-year Treasury yield surged 13 basis points to 5.08%, its highest level since July 2007, according to Dow Jones Market Data. Stocks fell in response, with the Dow dropping 0.71%, the S&P 500 falling 0.87% and the Nasdaq sliding 1.34% as both indexes retreated from record territory.
Barr signals more hikes ahead
The move followed remarks from Fed Governor Michael Barr, who said in a speech prepared for a housing conference in Chicago that policymakers still have more work to do even after last week's quarter percentage point rate hike. Barr called that move an “important action” that he supported along with the other 11 FOMC voters.
Inflation pressures build
The comments landed the same day S&P Global reported its flash inflation gauge hit its highest level since October 2022, driven by higher fuel and transportation costs and rising wages. Its composite index of manufacturing and services activity climbed to a 62-month high of 58.4, with the services gauge at 58.7 and manufacturing at 56.7.
Markets price in an October move
Traders now see a 71% probability of another quarter-point hike when the Federal Open Market Committee meets Oct. 27-28, according to the CME's FedWatch tool. The 2-year Treasury yield, seen as most sensitive to Fed policy, climbed more than 13 basis points to 4.9%.
A week ago, the FOMC approved a 25 basis point increase that lifted the benchmark rate to a target range of 3.75%-4%. Of the 18 meeting participants who submitted a projection, only two didn't expect another increase this year, and regional Fed presidents Alberto Musalem of St. Louis and Susan Collins of Boston both said this week they see a need for further hikes.
Sources: MarketWatch.com (snippet-based), CNBC
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