US Market Wrap: Bond yields rally, weighing on stocks amid a plethora of factors

• SNAPSHOT: Equities down, Treasuries down, Crude up, Dollar up, Gold down
• REAR VIEW: Energy Secretary Wright opposes blanket diesel export ban; Mixed reporting on whether US will go ahead with a temporary diesel export ban; Hotter-than-expected S&P Global Flash PMI; 2nd largest 5yr tail in history; Senior Iranian official reportedly says diplomacy with the US continues, however many differences remain; Fed's Barr says further rate hikes are likely needed to ensure a timely return to the 2% inflation target; BHP suspends operations at Escondida mine after an accident.
• COMING UP: Data: Japanese S&P PMIs Flash (Sep), Australian Jobs Report (Aug), German IFO (Sep), US Initial Jobless Claims (Sep/19). Events: Chinese President Xi's state visit to the US, Riksbank Policy Announcement, SNB Policy Announcement, Norges Bank Policy Announcement, Banxico Policy Announcement. Speakers: ECB's Schnabel, Lane; Fed's Williams, Barkin, Hammack, Paulson; BoE's Dhingra, Breeden, Lombardelli; SNB's Schlegel; Riksbank's Thedeen; Norges Bank's Bache. Supply: Italy, US.

MARKET WRAP

Stocks were sold on Wednesday as global yields surged. The RUT was the clear underperformer, while the SPX, NDX and DJI were all lower, with the equal-weight S&P (RSP) down 0.7%. Sectors were predominantly lower, with Utilities, Communication Services and Consumer Discretionary lagging, while Energy and Industrials outperformed. Semis and memory names were hit, likely reflecting some reversal of the recent Muse-induced strength following Tuesday's releases of GPT Astra 6 and Claude Opus 5.5, while Chinese AI firms were pressured overnight following probes into Moonshot and DeepSeek.

The weakness in stocks coincided with a global bond sell-off, with UST yields surging across the curve, particularly at the front end, as participants digested strong and inflationary US Flash PMI data, rising oil prices, further hawkish Fed speak, a very weak 5-year auction and reports surrounding a potential US diesel export ban.

Politico reported that the Trump administration was considering a 90-day ban on diesel exports. The report briefly weighed on diesel prices but raised concerns that such a move could push gasoline prices higher, adding to already elevated inflation concerns. However, a White House official later denied the report, calling it “fake news”. Energy Secretary Wright also appears opposed to an outright export ban, although he has indicated support for voluntary limits on diesel exports.

The Dollar was stronger amid the hawkish Fed speak and robust PMI data, while also finding support from weakness in energy-importing currencies. Concerns that restrictions on US diesel exports could particularly impact economies reliant on imported energy weighed on the Antipodeans, Yen and Pound.

Crude prices settled higher as Iran downplayed Tuesday's talks with the US, while further incidents were reported in the Strait of Hormuz and Iran continued to demand that its conditions be met before reopening the Strait. However, a senior Iranian official reportedly said Tehran is reviewing the US response to its proposal to end hostilities. Meanwhile, mixed reporting surrounding a potential US diesel export ban contributed to choppy trade. Attention turns to the Trump/Xi meeting tomorrow.

US

S&P GLOBAL FLASH PMI SEP: The report was strongly better-than-expected, with Manufacturing rising to 57.0, above the expected 53.6 (prev. 53.9). Services rose to 58.7 from 56.5 (exp. 56.0), leaving the Composite at 58.4 from 56, a new five-year high. Growth was driven by the service sectors, with its steepest rise in output in over five years. Employment also rose sharply, at a pace not seen for over four years; meanwhile, backlogs of work accelerated and supply chain delays worsened. Of concern, average input costs measured across both goods and services surged higher, hitting the highest since October 2022, blamed widely on higher fuel and transport costs, though wage pressures were also noted to have picked up in many cases. Pantheon Economics wrote that the composite PMI Q3 average reading is consistent with “real final sales to private domestic purchasers—a measure of 'core' GDP—rising at an annualised pace of around 4% this quarter”.

FED’s BARR (Voter): Said further rate hikes are likely needed to ensure a timely return to the 2% inflation target. He added that inflation is not clearly trending towards the 2% target in a timely way, with economic growth strong and the labour market solid. Barr noted that the Fed was out of position and made an adjustment in the right direction to reflect risks. Lastly, the Governor said risks to achieving 2% inflation have increased, while risks to the labour market have receded.

FIXED INCOME

T-NOTE FUTURES SETTLED 31 TICKS LOWER AT 105-01

Yields rally after hawkish PMI data, Fed speak and a woeful 5-year auction while global bonds hit by potential US diesel export ban. At settlement, 2-year +15.0bps at 4.897%, 3-year +16.0bps at 4.970%, 5-year +17.0bps at 4.997%, 7-year +16.7bps at 5.051%, 10-year +15.3bps at 5.108%, 20-year +12.6bps at 5.459%, 30-year +10.3bps at 5.398%.

THE DAY: The Treasury market crumbled on Wednesday, with yields surging across the curve and some maturities rising around 20bps at the peak of the move. There were several drivers behind the price action.

From the US, the S&P Global Flash PMI data was strong across the board, with Manufacturing rising to 57.0 from 53.9, above the 53.6 forecast, while Services rose to 58.7 from 56.5, above the 56.0 forecast, taking the Composite to 58.4 from 56.0. Importantly for the rates market, the report noted that input costs surged on the back of higher energy prices, with firms' input costs rising at the steepest rate for four years, adding further upward pressure on selling prices and inflation in the coming months.

Hawkish Fed speak continued, with Fed Governor Barr noting that further rate hikes are likely needed to ensure a timely return to the 2% inflation target. Barr said inflation is not trending towards target in a timely manner, while economic growth remains strong and the labour market is solid.

The 5-year auction was very weak. The sizeable 3.1bp tail — the second-largest on record — weak bid-to-cover, sharp deterioration in indirect demand and elevated dealer allocation pointed to a very poor reception. Direct demand was strong, but was nowhere near enough to offset the weakness elsewhere. Most notably, the auction struggled despite offering a substantial increase in outright yield versus August, suggesting the significant cheapening was insufficient to entice broader end-user demand.

There was also mixed reporting regarding a potential US diesel export ban after Trump said on Tuesday that the administration was examining the idea. Fears of a diesel export ban likely added to pressure on bonds. While restricting exports could lower domestic diesel prices, it could also push US gasoline prices higher, while removing diesel supply from global markets could raise fuel prices abroad, adding to broader inflation concerns. Global bonds were also heavily sold amid the developments, likely adding to the pressure on Treasuries.

The combination of strong and inflationary PMI data, hawkish Fed speak, concerns surrounding a potential diesel export ban and a very weak 5-year auction created a potent mix for Treasuries to tumble on Wednesday. However, T-notes pared some of their losses after a White House official denied a Politico report that the US was considering a 90-day diesel export ban. At the extremes of the move, the entire curve aside from the 2-year traded above 5%, with the 2-year reaching around 4.94%.

The Treasury also announced a maximum size of USD 6bln for Thursday's 20-30yr bond buyback operation, matching the 10-20yr sector and in line with expectations from analysts at Wrightson. The announcement had little impact on price action.

Supply

Notes

• US sold USD 70bln of 5yr notes: Tail 3.1bps
• US sold USD 28bln of 2-year FRNs; met with weak demand.
• US to sell USD 44bln of 7yr notes on September 24th.

Bills

• US sold 17-week bills at a high rate of 4.135%, B/C 2.81x
• US to sell USD 90bln of 4-week bills and USD 84bln of 8-week bills on Sept 24th

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Oct 17.7bps (prev. 13.9bps), Dec 37.1bps (prev. 33bps).
• EFFR at 3.88% (prev. 3.88%), volumes at USD 103bln (prev. USD 95bln) on September 22nd
• SOFR at 3.87% (prev. 3.85%), volumes at USD 2.94tln (prev. USD 2.912tln) on September 22nd
• NY Fed RRP op demand at 0.46bln (prev. 0.45bln) across 4 counterparties (prev. 8) on September 23rd

CRUDE

WTI (X6) SETTLED USD 1.64 HIGHER AT USD 92.16/BBL; BRENT (Z6) SETTLED USD 2.71 HIGHER AT 98.12/BBL

Crude prices settled higher as substantial progress between the US and Iran remains absent despite further news out of the US pointing towards a positive meeting between the US and Iran. A senior Iranian official speaking to Reuters noted many differences remain, though diplomacy continues. The Iranian President spoke at the UNGA; however, market moves were small through the speech, which was devoid of escalatory or de-escalatory remarks.

The main updates regarded a potential diesel export ban. Net-net, the US Energy Secretary Wright opposed a blanket ban on diesel exports, but is opting for a voluntary cap. Later, Politico reported that the Trump admin is nonetheless preparing a plan to ban exports of diesel for 90 days; however, this was later rejected by a White House official speaking to Reuters. Diesel prices were choppy throughout the constant contradictory headlines, ultimately settling 0.2% lower on Z6.

The weekly EIA report was met with a muted reaction. Commercial crude stocks showed a 2.969mln build, bigger than the 1.8mln build in last night's private inventory report. The SPR drew by 0.405mln. Gasoline Stocks drew 1.686mln vs. (exp. 0.1mln) and Distillate Stocks drew 0.428mln vs. (exp. -0.6mln). Crude production was little changed at 13.94mln (prev. 13.944mln).

EQUITIES

CLOSES: SPX -0.75% at 7,706, NDX -0.85% at 30,470, DJI -0.68% at 51,517, RUT -1.77% at 2,839

SECTORS: Communication services -1.89%, Utilities -1.88%, Consumer discretionary -1.63%, Real estate -1.48%, Technology -0.66%, Health -0.65%, Materials -0.65%, Financials -0.44%, Consumer staples -0.17%, Industrials -0.11%, Energy +1.04%.

EUROPEAN CLOSES: Euro Stoxx 50 -0.38% at 6,301, Dax 40 -0.59% at 25,427, FTSE 100 -0.03% at 10,705, CAC 40 -0.39% at 8,123, FTSE MIB -0.21% at 51,987, IBEX 35 -0.62% at 19,632, PSI -0.25% at 9,632, SMI -0.23% at 13,922, AEX -0.27% at 1,108

STOCK SPECIFICS

• Chips (INTC, AMD, ARM): All lower in pre-market, adding to downside from late Tuesday after OpenAI announced Astra 6; all three were beneficiaries of Meta's Muse. SOXX lower in pre-market trade
• Microsoft (MSFT): Plans to increase Copilot discounts as it launches an AI 'super app', according to The Information; separately upgraded at Stifel
• Alibaba Group (BABA): Chinese AI stocks fell after a report that regulators opened a data security probe into DeepSeek and Moonshot AI
• Cedar Fair (FUN): Activist investor Jana Partners is urging Six Flags Entertainment to hire banks and explore a sale, according to WSJ
• KB Home (KBH): Reported weaker housing demand, lower deliveries and orders, and softer housing conditions, which outweighed an earnings beat
• General Mills (GIS): Inflation concerns offsetting earnings beat
• Marathon Petroleum (MPC): Paring some of Tuesday's losses after Trump said he is considering a diesel export ban; WSJ reports Trump's support for the ban was seen to 'blindside' industry officials
• GE HealthCare Technologies (GEHC): Raised quarterly dividend 14% to USD 0.04/shr
• Immunovant (IMVT): Study of IMVT-1402 in cutaneous lupus erythematosus did not achieve statistical significance on the primary endpoint
• Paychex (PAYX): Missed Q1 revenue estimates at its largest segment, management solutions.
• Cintas (CTAS): Top- and bottom-line beat; also raised guidance in line with forecasts.
• Disney+ (DIS) to lift price by 13% to USD 21.49 per month, sources suggest.
• Paramount (PSKY) weighs tapping Musk for equity investment, Semafor reports.
• McDonald’s (MCD) shares fell to four-year lows after the company said US business was expected to be slightly negative in Q3. The company plans about USD 8.5bln in franchisee support through 2036, alongside increased investment in employee training, equipment and technology.
• Anthropic's biolab reportedly made a discovery it is comparing to CRISPR (CRSP), reports The Verge.

FX

The dollar was firmer today, supported by sharp rises in global yields, stronger-than-expected US data, and growing economic pressure for Europe and APAC FX if the US goes ahead with a US diesel export ban. Additionally, further Fed speak pointed towards another hike, with Governor Barr noting that further rate hikes are likely needed to ensure a timely return to the 2% inflation target.

Concerning data, S&P Global Flash PMI for September was notably better than expected, with the composite index hitting a new five-year high, driven by a surge in business growth and acceleration in job gains; however, input costs saw their steepest increase in four years. US yields marched higher on the report, briefly extending on a poor US 5yr note auction that was met with the second-largest tail on record.

Ahead, focus will remain on the diesel situation, in which Energy Secretary Wright has opposed a blanket ban on diesel exports, opting for a voluntary cap. Thereafter, reporting was mixed on whether the admin would go ahead. Additionally, Trump is set to meet with Xi on Thursday. Recent remarks from both sides suggest AI has been one of the main talking points. DXY hit highs of 101.231 alongside a new YTD high in US 2yr yields of 4.945% as money markets place a ~70% chance of another 25bps rate hike at the Fed's October meeting.

G10 FX and EMs were all weighed by their own domestic concerns amid rising yields and likely greater downside risks to respective economies if the US goes ahead with a diesel export ban. Amongst the worst performers were those heavily reliant on energy imports (AUD, NZD, GBP, JPY). EUR was still pressured despite French and German PMI metrics showcasing a resilient European economy, despite the Iran war.