US Treasuries and stocks fall after robust services sector data

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US Treasuries sold off on Wednesday, taking stocks along with them, after data showing unexpected strength in the country’s vast services sector supported the thesis that a “soft landing” for the domestic economy could mean interest rates remain elevated for an extended period.

Investors were also assessing the potential inflationary effect on the global economy of oil prices reaching their highest level in 10 months after big producers agreed to extend supply cuts.

The yield on the policy-sensitive two-year US Treasury was up 0.06 percentage points to 5.02 per cent, while the yield on the 10-year note climbed 0.03 percentage points to 4.3 per cent.

Yields, which rise as bond prices fall, jumped in the morning after the Institute for Supply Management reported that its US services sector purchasing managers’ index rose to a six-month high of 54.5 in August. That was above analysts’ forecasts, which anticipated a slight decline.

The data suggests that consumer demand, one of the main drivers of the US economy, has remained resilient as the Federal Reserve has repeatedly increased interest rates. The vast services sector has expanded in 38 of the past 39 months, while the US manufacturing sector has contracted for 10 successive months.

“It may well be that the summer entertainment boon has been a big factor with concerts and cinemas pulling in record revenues and ancillary businesses feeling the benefits too,” James Knightley, chief international economist at ING, said of the ISM report.

Recent data showing a slowdown in some parts of the US economy and resilience in others has buoyed investor hopes of a “Goldilocks” scenario in which the Fed might succeed in taming inflation without triggering a recession. That could mean, however, that interest rates stay higher for longer and growth could still slow.

“The fastest pace of rate hikes in a generation has yet to fully quell activity in the service sector,” Wells Fargo analysts wrote on Wednesday, while noting that consumers could tighten their belts in the near future.

“Pandemic-era savings are running out, credit card rates are north of 20 per cent and the job market is no longer white-hot as it was earlier this year.”

Wall Street’s benchmark S&P 500 fell 0.7 per cent, with the tech and consumer discretionary sectors the worst performers. The tech-focused Nasdaq Composite declined 1.1 per cent.

Oil prices jumped to their highest level since November, as Saudi Arabia and Russia vowed to extend their voluntary supply cuts until the end of the year. Brent crude settled 0.6 per cent higher at $90.60 a barrel and US equivalent West Texas Intermediate gained 1 per cent to $87.54 a barrel.

Saudi Arabia, which leads the expanded Opec+ cartel with Russia, has cut an additional 1mn barrels a day from the global market since July, in what was originally billed as a temporary measure. Russia said its 300,000 b/d export reduction would also stay in place until December.

“While oil prices have rallied recently, oil markets look likely to remain in deficit over the upcoming months, and we still see scope for crude oil prices to rise further,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

As two of the world’s largest oil producers strive to boost prices, the move threatens to reignite inflation pressures globally, raising investors’ concerns over what this means for central banks’ policy tightening campaigns.

Rising oil prices hit stock markets in China — the world’s largest importer of the fossil fuel — where the benchmark CSI 300 fell 0.2 per cent.

In Europe, the region-wide Stoxx Europe 600 ended the day 0.6 per cent lower, marking its sixth successive day of declines. France’s Cac 40 gave up 0.8 per cent and Germany’s Dax lost 0.2 per cent.

A day earlier, the eurozone-wide composite purchasing managers’ index came in below market expectations, adding to signs that the single-currency bloc is struggling under the weight of high interest rates.

The reading offered “more evidence for increasingly weak growth in Europe ahead of the [European Central Bank’s] decision next week, and will only add to the fears of stagflation”, said Deutsche Bank strategist Jim Reid.

The dollar rose as much as 0.1 per cent against a basket of six peer currencies to trade at its highest level since March when a crisis in the banking sector pushed investors towards the haven currency.