10-Year Jumps To Highest Level Since ’07 as Pricey Crude Lifts Inflation Expectations: Sept. 15, 2026

The 10-year yield soared to its highest level since July 2007 this morning, as ongoing geopolitical tensions have caused WTI crude to change hands at nearly $105 per barrel. Pricey oil is lifting inflation expectations and sapping investor appetites for fixed-income assets, a result of participants demanding more compensation before buying government bonds. The heavier cost of capital, rising fuel charges and worries about the potentially adverse societal impact of AI’s rapid adoption have pushed stocks to their weakest prices in roughly six weeks ahead of tomorrow’s Fed decision, in which Chair Warsh is anticipated to deliver his first hike at the helm. Today’s economic calendar, moreover, hasn’t been too eventful, but the strongest ADP hiring number in eight weeks certainly signaled that the labor side of the central bank’s mandate is solid and can manage a 25-bp increase or two. All major equity benchmarks and the 11 principal sectors minus energy are retreating, as Wall Street struggles so far during this traditionally weak seasonal period with the midterm elections only seven weeks away. Meanwhile, the greenback is strengthening while the Treasury curve is recovering modestly, with the shorter maturities seeing lower rates on the session and the pivotal 10-year tenor dropping below the critical 5-handle. Elsewhere, traders are hedging prior to this Wednesday’s big monetary policy verdict with volatility protection premiums climbing and commodities broadly advancing.

Hiring Accelerates

Private sector hiring accelerated at the end of August with this morning’s headline figure from ADP matching its highest result since early June. The 16.25k average jobs added in each of the four weeks leading to Aug. 29 climbed from the prior print’s 12.25k and strengthened the argument that the labor market remains healthy. Indeed, layoff appetites remain subdued while payroll gains have generally been slower because firms are having difficulties matching vacancies with qualified applicants.

Past performance is not indicative of future results.

The Market Needs a Hike To Calm the Long-End

The market is poised to benefit from an interest rate hike tomorrow that could ease price pressure expectations by demonstrating that the Fed is serious about fighting above-target inflation. And with cost forces excluding food and energy hovering in the low 2s, a dovish 25-basis point (bp) increase is justified as Wall Street can begin to contemplate whether it will be a one-and-done for the central bank. The quarter-percentage lift is likely to result in a flatter yield curve by the end of the day, as monetary policy discipline collides with the reality that heavier fuel charges aren’t yet materially raising prices across the overall economy, which is why the headline and core consumer inflation gauges are sustaining a 100-bp spread with the former at 3.4% but the latter at 2.4%. Another key consideration for bulls is that higher crude this year is a terrific story for 2027, as positive base effects are positioned to lower the bar, or make it easier for Warsh and company to hit the 2% objective.

International Roundup

South Korea’s Trade Surplus Grew in August

South Korea’s trade surplus climbed from $30.9 billion in July to $34.7 billion last month with the value of shipments to foreign markets jumping a staggering 75.8% year over year (y/y). The value of imports, meanwhile, climbed only 23.1%, according to provisional data from the Bank of Korea.

The surplus roughly matched the economist consensus estimate and was driven by an ongoing acceleration in price increases and demand for AI technology. While the value of agricultural, forestry and marine products shipped beyond the country’s borders slipped 8.2% y/y, manufactured products were up 76%. The computers, electronic and optical equipment category was the outstanding performing, posting a 174.7% y/y jump. Coal products and petroleum products, with a 64.2% hike, had the second fastest growth. South Korea imports virtually all of its crude oil, but it is a next exporter for refined energy commodities. Other categories that experienced noteworthy increases and the extent of the changes were as follows:

• Basic metal products, 20.5%
• Chemical products, 19.4%
• Machinery and equipment, 12.4%
• Wood and paper products, 9.7%
• Electrical equipment, 8.8%
• Other manufacturing products, 7.3%

In addition to the decline in agricultural, forestry and marine products, exports of transport equipment and fabricated metal products sank 25.1% and 3.3%, respectively.

While Prices Fall on Monthly Basis

Export and import prices sank 3.7% and 2.4%, respectively on a month-over-month basis but were still up 42.4% and 15.6% y/y.

China’s Industrial Production Picks but Other Indicators Are Discouraging

Industrial production in China climbed 5.2% y/y last month, which exceeded both the economist consensus estimate for a 4.8% increase and July’s 4.5% growth. For the first eight months of this year, however, production was up 5.3% y/y, an unchanged rate from the year-to-date period that ended in July. Other metrics released last night were discouraging as follows:

• Fixed asset investment in August dropped 7.2% y/y. Economists anticipated a 7.1% descent following July’s 6.7% contraction. Broadly speaking, China continues to struggle with excess manufacturing capacity and weak domestic consumer demand.
• The multi-year decline in home prices continued last month with values falling 3% y/y. The decline was modestly less severe than the 3.2% southward change in July. With the exception of June and May of 2023, home prices have fallen every month since May 2022.
• Retail sales grew only 0.4% y/y in August, a weaker pace than July’s 0.6% growth. It was also below the economist consensus expectation of 0.7%. China has tried to juice domestic demand with consumer subsidies, but the results of the government’s programs have been waning.
• The country’s unemployment rate climbed from 5.2% in July to 5.3%, surpassing the 5.2% economist consensus estimate.