10-Year US Treasury Yield Hits 5% as Inflation Concerns Rise

Market Wrap-up: Higher oil prices fuel inflation concerns and strengthen expectations for a Fed rate hike.  

Markets are increasingly pricing in a Fed rate hike tomorrow as rising energy prices added to inflation concerns, following a stronger-than-expected August core CPI reading.

The outlook for US interest rates helped the US dollar remain broadly firm, with the US Dollar Index (DXY) holding above 99.00 and trading around 99.40, although it remained below the 100.00 level.

The 10-year US Treasury yield reached 5% during the latest session. The level was briefly reached in 2023 and had not been seen previously since 2007.

Higher Treasury yields imply higher borrowing costs, as the 10-year yield serves as a benchmark for borrowing costs across the wider economy.

US equities also came under pressure. The S&P 500 fell 0.48% to 7,619.98, while the Nasdaq Composite declined 0.56% to 26,186.41. The Dow Jones Industrial Average fell 152.09 points, or 0.29%, to 52,421.20.

At their session lows, the S&P 500 and Nasdaq were down 0.8% and 1.3%, respectively, while the Dow Jones fell by nearly 300 points, or around 0.6%.

Spot gold fell 1.8% to $4,271.59 per ounce, its lowest level in more than a month, dating back to 7 August.

Selling pressure was also evident across major currencies, including the euro, pound, Japanese yen and Australian dollar, amid changes in risk sentiment and interest rate expectations.

Sterling held up better than other major currencies, trading around 1.3510 ahead of the UK employment report. The data is expected to be an important input for GBP/USD ahead of the Bank of England's interest rate decision on Thursday.

According to LSEG data on Monday, financial markets were pricing in a 30% probability of a 25-basis-point rate hike on Thursday, up from below 10% at the start of last week.

Meanwhile, crude oil prices continued to rise on 14 September after Saudi Arabia closed a key pipeline that transports oil without passing through the Strait of Hormuz. The move reduced available supply at a time when the oil market was already facing tight conditions.

UAVs launched from Iraq damaged the East-West pipeline on 10 September, prompting the Saudi government to close the key crude oil route.

Separately, a planned diplomatic meeting between Iran and Gulf Arab states in Oman to discuss the Strait of Hormuz was postponed amid continued regional tensions.

Brent crude rose 1% to close at $105.68 a barrel after approaching $110 during the session. US WTI crude gained 1.3% to $101.39 after briefly nearing $105.

Looking ahead today, markets will focus on US labour market data, including the weekly ADP Employment Change, alongside the UK's Unemployment Rate. The New York Empire State Manufacturing Index will also be watched, with the reading expected to fall from 20.6 to 14.75.

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DXY:

Key takeaway:

• The US dollar remained firm as markets increased bets on a Fed rate hike ahead of tomorrow’s decision.
• Developments in the Middle East lifted safe-haven demand for the US dollar.

Technical Outlook:

• Daily Bias: Bullish
• Support: 98.96
• Resistance: 99.73

Gold:

Key takeaway:

• Gold fell 1.8% to $4,271.59 per ounce, reaching its lowest level in more than a month.
• Rising US Treasury yields added to the pressure on the precious metal. 

Technical Outlook:

• Daily Bias: Bearish
• Support: 4,253 
• Resistance: 4,402

Oil:

Key takeaway:

• Oil prices extended their gains amid renewed developments in the Middle East and concerns around supply disruptions.
• A planned diplomatic meeting involving Iran to discuss the situation around the Strait of Hormuz was postponed amid continued regional tensions.

Technical Outlook:

• Daily Bias: Bullish
• Support: 95.38 
• Resistance: 104.47

GBP/USD:

Key takeaway:

• Sterling held relatively firm ahead of Thursday’s BoE decision, with markets largely expecting rates to remain at 3.75%.
• Today’s UK employment data could provide further clues on the BoE’s policy outlook.

Technical Outlook:

• Daily Bias: Bearish
• Support: 1.34640
• Resistance: 1.35350

Calendar Watch:

• US: ADP Employment Change Weekly and the Empire State Manufacturing Index.
• UK: Unemployment Rate, ahead of Thursday’s BoE rate decision.

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