US Treasury yields are trading at highs across the curve. The 10-year yield is above 5.09%, and the 30-year is near 5.39%. The question for traders is whether yields can stay at these levels as the market weighs strong growth against the risk of more inflation.

At the time of the yield snapshot:

• 2-year: 4.8952%. The last comparable daily reading was 4.92% on May 30, 2024.
• 5-year: 4.9828%. The last comparable daily reading was 5.01% on July 13, 2007.
• 10-year: 5.0913%. The last comparable daily reading was 5.11% on July 13, 2007.
• 30-year: 5.3891%. The last comparable historical reading was 5.42% on July 28, 2004.

The data are giving the Fed little reason to relax

Today’s flash S&P Global US composite PMI rose to 58.4 from 56.0 in August, pointing to stronger business activity. That follows an August employment report that added 162,000 jobs, well above the 56,000 expected in a Reuters survey. Inflation was less encouraging: August consumer prices rose 0.4% on the month and 3.4% from a year earlier. Gasoline rose 3.9% in August, while prices excluding food and energy rose 0.3% on the month.

The Fed commentary reflects that combination. Richmond Fed President Tom Barkin said yesterday that inflation risks outweigh employment risks and pointed to the rebound in job gains and continued consumer spending in explaining last week’s rate hike. In other words, policymakers are seeing price pressure at a time when the economy has remained firm enough to handle tighter policy.

Higher oil, gasoline and diesel prices add another concern. Diesel helps move goods by truck and rail and powers farm equipment. Higher fuel costs can work their way into transportation, farming, food processing and delivery costs. How much businesses pass through to customers will help determine whether the energy shock becomes a broader inflation problem.

Could policy provide some relief?

There is a potential counterweight to that inflation story. President Trump has said he supports examining restrictions on US diesel exports, and Treasury Secretary Scott Bessent said the administration is studying whether a full or partial ban would be feasible. Louisiana Governor Jeff Landry has called for a 90-day ban, but the administration has not announced a ban or committed to that duration.

Keeping more diesel at home could increase domestic supply in the short term. There is also a complication: refiners and energy analysts warn that an export ban could lead refineries to cut output and could raise prices elsewhere. Traders will need to judge any announced measure by what it does to actual fuel supply and prices, rather than by the announcement alone.

The administration has also emphasized domestic energy production. Over time, more supply could help, but the more immediate question for oil prices remains the disruption tied to Iran. Trump said yesterday that he believes a deal with Iran could come after the November midterm elections, possibly before. He also said the two countries had been talking. That leaves room for a diplomatic development, but there is no agreement in place. It takes two to tango, and traders will want to see progress from both sides before pricing in a lasting easing of the supply risk.

US stocks feel the pressure

At the time of the stock snapshot:

• Dow industrial average: 51,568.15, down 301.05 points, or about 0.58%
• S&P 500: 7,709.77, down 54.86 points, or 0.71%
• Nasdaq composite: 26,926.13, down 318.15 points, or 1.17%
• Russell 2000: 2,850.78, down 39.14 points, or 1.35%
• Nasdaq 100: 30,413.71, down 316.89 points, or 1.04%

Higher Treasury yields are lifting the dollar and adding pressure to stocks. If yields stay near their highs, that pressure may persist. Relief in energy prices or a pullback in yields could change the picture, but traders need to see those moves take hold.

The wheels are all in motion with yields the main catalyst for the USD, stocks.  The view is not great with the war(s) continuing and inflation not looking like it wants to come down. In the meantime, the AI or should I say SI (or Super Intelligence) train continues to chug along helping to keep the economy elevated.  .  

PS stocks continue to slide with the Dow down -0.63%, S&P down -0.81%, NASDAQ down -1.25%, Russell 2000 down -1.55% and NASDAQ 100 down -1.412%

This article was written by Greg Michalowski at investinglive.com.