Strong US Services PMI Triggers Bond Yield Surge, Dollar Rally

• The flash S&P Global US services PMI for September registered 58.7, beating the 56.0 forecast.

Market highlights:

• WTI crude rose by $1.61 to $89.59.
• US 10-year Treasury yields climbed 14.5 basis points to 5.11%.
• Gold fell $71 to $4283.
• The S&P 500 declined 0.8%.
• The US dollar was the strongest major currency, while the Australian dollar underperformed.

The 5% resistance level in US 10-year rates was decisively broken, making it a key day for markets. Pressure began building in Europe and carried over into the US, but the catalyst came from a much stronger-than-expected S&P Global PMI reading for the US. The data points to an accelerating economy and renewed price pressures. At the very least, markets now see a 65% probability of a Federal Reserve rate hike in October, with growing concerns that the FOMC may be falling behind and will have to tighten further. Consequently, traders have added 10 basis points of rate increases to the path through 2027, and 94 additional basis points from current levels.

The greenback surged, pushing USD/JPY up 92 pips to 158.27, a level that once again raises the prospect of intervention. However, the move is backed by fundamentals, meaning any intervention might be ineffective, especially if it goes against the Fed's policy direction. Equities also felt the heat, with the Russell 2000 underperforming as expected, dropping 1.6% compared to the S&P 500's 0.8% decline. Gold suffered as well, losing ground against the dollar, which offered higher yields.

Iran's influence waned on Wednesday, but the market largely decided that the situation remains unchanged. Reports emerged that Iran proposed terms similar to those the US had already accepted in the MOU, though the reliability of those sources was questionable.

All told, the session felt like one in which the Fed and Treasury were beginning to lose their grip, but it was just a single data release, and not an especially significant one. With few major releases remaining this week—just initial jobless claims on Thursday and durable goods orders on Friday—a temporary easing in volatility is possible. Anticipation for the Trump-Xi meeting is minimal.