10-Year Yield Jumps to 35-Month High as Geopolitics Lift Inflation Risk: Sept. 9, 2026

Geopolitical tensions flared overnight as military attacks directed at Iranian and American vessels squashed hopes of a pause in Middle East hostilities. The violence is transpiring just weeks after the world thought Washington and Tehran would move into a cold war characterized by isolation attempts, political pressures, and economic sanctions rather than physical assaults, and the abrupt return to direct strikes is catching investors off guard. Indeed, WTI crude has jumped to nearly $97 per barrel, which is significantly lifting inflation risk and forward expectations of cost forces while pushing the 10-year Treasury to its loftiest yield in 35 months. The 2-year maturity, more sensitive to monetary policy projections, has soared to its highest level in 26 months, as fixed-income watchers increasingly price in rate hikes from the Fed. But overall, the curve is climbing in bear-steepening fashion led by duration, as heavier fuel charges that could potentially spread throughout the economy disincentivize the buying of longer-term bonds. Additionally, an improvement in ADP’s weekly hiring numbers bolstered the case for a 25-bp increase by the central bank next Wednesday. The tighter financial conditions are punishing stocks, which are continuing to suffer from the September blues, with every major domestic equity benchmark, sector and subcategory retreating minus those related to energy. The greenback, commodities, volatility protection instruments are finding bids, however.

Hiring Picks Up

Private-sector hiring accelerated to its fastest pace of expansion in six weeks, an improvement that arrives on the heels of last Friday’s blockbuster beat on nonfarm payrolls. The 12k headline figure, which represents the average number of jobs added in each of the four weeks leading to Aug. 22, marked an increase from the prior period’s 10k, according to ADP. The growth suggests that the economic cycle remains on solid footing; however, when these strong employment numbers are paired with heavy fuel charges and above-target inflation, they cause financial conditions to tighten while potentially warranting a Federal Reserve interest rate hike.

PPI Likely To Reflect First Acceleration Since May

Tomorrow’s Producer Price Index (PPI) is expected to reflect the first annualized acceleration since May as the pain of heavier fuel charges travels through supply chains. July’s 4.7% year-over-year (y/y) reading is anticipated to climb to 5.3%, according to a poll of economists amidst not one of the surveyed experts believing that a number below 5% is in the cards. The depiction of quickening wholesale inflationary pressures at 8:30 a.m. is emblematic of the significant risks in store for already above-target consumer cost forces if geopolitical tensions aren’t resolved soon, because the surge in oil makes it nearly impossible to get down to the Federal Reserve’s 2% objective. It’s exactly the reason that the European Central Bank is projected to hike its key rate 25 basis points before this Thursday’s PPI. It would be the second increase this year, and the monetary policy institution is effectively leading its counterparts that have been patiently waiting for the US-Iran conflict to end, in aggressively tightening its stance.

International Roundup

Inflation Accelerates Marginally in China

China’s latest gauges of consumer and factory gate prices depict inflation strengthening modestly in August even with persistent weakness in domestic demand, according to yesterday’s releases from the National Bureau of Statistics. The PPI, which measures wholesale prices, was up 3.8% y/y, the fifth consecutive report of price pressures after more than three years of painful deflation. Despite exceeding the economist consensus forecast of 3.6% and being a tad hotter than July’s 3.5% result, it offers a mixed view of the world’s second-largest economy. Much of the increase in stickers resulted from the base-effect, or a comparison to a low previous reading. More costly energy commodities and foreign demand from AI companies for high- tech semiconductors and related equipment also contributed to the higher headline result. Broadly speaking, factory output price pressures for other categories that are more dependent on domestic demand were cooler. China has been trying to juice domestic demand by offering subsidies on various consumer items, but the impacts of the program appear to be waning.

The country’s Consumer Price Index portrayed a similar scenario. It was up 0.4% y/y, which was slightly hotter than the consensus forecast at 0.3% and a reversal from July’s 0.1% slip. For the year-over-year result, prices ascended 0.8%, which matched the consensus expectation and accelerated slightly from 0.5% in the preceding month. Consumer sentiment has been hit hard by home prices declining every month but two since May 2022. The country has tried to ease the crisis by easing restrictions on foreigners buying real estate. In a related manner, retail sales were up only 0.6% y/y in July, substantially underperforming the economist consensus estimate of 1.5% and slowing from June’s 1% rate.