Hot growth data drives yields to 2007 highs

Stocks fell across the board on Wednesday. The S&P 500 closed at 7,706, down 0.75 percent, the Dow Jones Industrial Average closed at 51,512, down 0.68 percent, and the Nasdaq Composite closed at 26,936, down 1.13 percent. The real move was in the bond market, where the 10-year Treasury yield jumped to 5.11 percent, its highest level since June 2007, and the five-year yield pushed above 5 percent for the first time since 2007.

The trigger was a single data release at 9:45am Eastern. S&P Global publishes a flash PMI each month, which is an early survey of purchasing managers at hundreds of American companies asking whether business is better or worse than last month. Any reading above 50 means the economy is expanding, and September came in at 58.4, the strongest since July 2021 and far above the 55.2 that forecasters expected.

That sounds like good news, and in isolation it is. The problem was buried in the same report. The survey's measure of what companies pay for their inputs, meaning raw materials, fuel, shipping and labor, jumped to 66.4, the highest since October 2022 and a six point leap from August. Firms also reported growing backlogs of unfinished orders, which is survey language for demand outrunning capacity. When companies are busy, paying more for supplies, and have customers waiting, they raise prices, because they can.

Here is the chain that connects that to your screen. Investors read those numbers as evidence that inflation is reaccelerating, which means the Federal Reserve is more likely to raise its benchmark interest rate at its meeting on October 27 and 28 rather than cut it. Bond investors holding a Treasury paying a fixed 4.97 percent do not want to keep it if new bonds will soon pay more, so they sell. Selling pushes a bond's price down, and because a bond pays a fixed dollar amount, a lower price mechanically means a higher yield for whoever buys next. The 10-year yield rose 13 hundredths of a percentage point in a single day, which is a large move for the safest asset in the world.

Stocks then fall for a separate reason. A share of stock is a claim on profits a company will earn years from now, and when a risk free Treasury pays more, those distant profits are worth less today by comparison. That hits fast growing technology companies hardest, because more of their value sits far in the future, which is why the Nasdaq fell twice as much as the Dow. Rising oil compounded it, with West Texas Intermediate crude settling at $92.16, up 1.81 percent, feeding straight back into the same fuel and freight costs the survey flagged.