By Karen Brettell
NEW YORK, Sept 23 (Reuters) - US shares dropped while benchmark 10-year Treasury yields hit the highest level since 2007 on Wednesday after data showed that US business activity raced to a more than five-year high in September, fueled by a surge in new orders.
S&P Global said on Wednesday its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 58.4 this month. That was the highest level since July 2021 and followed a reading of 56.0
in August.
“Services continue to lead but manufacturing output picked up sharply, with factory hiring rising at the fastest pace since February 2021,” said Adam Button, chief currency analyst at investingLive. “This is a nice jump and underscores the Fed's rate hike and hawkish stance."
Yields have increased to multi-year highs as traders price in the likelihood of further Federal Reserve interest rate hikes with inflation remaining stubbornly above the US central bank’s 2% annual target.
Interest rate sensitive 2-year Treasury yields rose 8.49 basis points to 4.862%, the highest since June 2024.
The benchmark 10-year yield jumped 8.7 basis points to 5.054%, the highest since 2007.
Fed funds futures traders are now pricing in 73% odds of an October rate hike, up from 53% earlier.
Fed Governor Michael Barr said on Wednesday the US central bank took an important step last week to "recalibrate" short-term borrowing costs to bring down inflation, and will likely need to deliver further interest rate hikes.
Stocks dropped as the Treasury yields moved higher.
The Dow Jones Industrial Average fell 0.18%, the S&P 500 dropped 0.53% while the Nasdaq Composite was down 1.05%.
The pan-European STOXX 600 index slid 0.27% and an MSCI index of global stocks fell 0.51% after four consecutive days of gains.
GEOPOLITICS IN FOCUS
Oil prices rose as traders waited on possible talks to end the Iran war and ahead of a highly anticipated summit between US President Donald Trump and Chinese President Xi Jinping in Washington where tensions over trade, technology and Tehran will play out against a backdrop of pomp and ceremony.
They had dropped this week on rising Gulf supplies and hopes for diplomatic talks to halt hostilities in the Middle East.
Trump warned on Tuesday that he could "annihilate" Iran, but he also said his envoys had held productive talks with mediators of Iran to end the war.
However, caution persists as similar hopes have been quickly dashed in the past.
"We've been through a series of starts and stops like this," said Cole Smead, CEO and portfolio manager at Smead Capital Management. "We're in a pretty momentum-dominated market. I don't think most people feel comfortable stepping in the way of headlines."
U.S. crude rose 1.49% to $91.87 a barrel and Brent rose to $101.62 per barrel, up 2.39% on the day.
Iranian President Masoud Pezeshkian said on Wednesday that Iran will not surrender, but that he believes in diplomacy to try to end the conflict.
DOLLAR GAINS
The prospect of higher rates helped the dollar hit multi-week highs versus the euro, sterling and Canadian dollar. The euro dropped 0.5% to $1.1389, the lowest since July 29.
Analysts said that a call from Trump to ban US diesel exports was potentially bad news for European inflation since the zone relied heavily on US shipments of the fuel.
The dollar was 0.56% firmer against the yen at 158.25, with speculators wary of drawing more Japanese intervention on any push past 160.00.
Spot gold fell 1.55% to $4,287.05 an ounce.
(Reporting by Karen Brettell and Niket Nishant; Editing by Christopher Cushing, Kim Coghill and Gareth Jones)
