US Market Wrap: Stocks slide and yield curve steepens as oil reverses from peaks

SNAPSHOT: Equities down, Treasuries steepen, Crude down, Dollar up, Gold down REAR VIEW: Strong US 10yr note auction; Consumer Inflation expectations tick higher on 1 and 3yr, 5yr maintained; French Finance Ministry says no change in bond issuance strategy; France to release 10mln barrels of diesel from reserves; IEA members have expressed support for accelerating the oil stock releases announced in the collective action of March; Senior Iranian official says the US must first meet Iran's conditions before the nuclear issue can be discussed; First LNG train at Qatar's Northfield east expansion project is reportedly ready to start; Senior Euro Zone official does not see contagion from the rise in French bond yields so far; The EU is preparing a temporary import cap on Chinese hybrid cars COMING UP: Data: German Trade Balance (Aug), US Initial Jobless Claims (Oct/03), Atlanta Fed GDP (Q3) Events: ECB Minutes (Sep), UK Holborn and St Pancras parliamentary by-election Speakers: US President Trump; ECB's Lane; BoE's Greene, Bailey, Lombardelli; Fed's Waller, Kashkari, Musalem Supply: Japan, US Earnings: PepsiCo MARKET WRAP Stocks finished lower on Wednesday in relatively broad-based weakness, with the Russell 2000 and equal-weight S&P 500 underperforming the major indices. The DJI also lagged, while the SPX and NDX saw more modest losses. Sectors were predominantly lower, with Industrials, Materials and Real Estate lagging, while Health Care outperformed; Consumer Discretionary and Staples also outperformed but were flat. Treasuries recovered from earlier weakness to finish mixed-to-firmer, with the curve bull steepening as the front end led the rally while the long end was little changed. T-notes initially tracked weakness in European government bonds amid renewed French fiscal concerns, before recovering as crude reversed from its highs and following another stellar US 10-year auction. The auction stopped through by 1.7bps with strong B/C and indirect demand alongside an exceptionally low dealer takedown. FOMC Minutes generated little reaction and revealed little new information. In FX, the Dollar firmed despite the recovery in Treasuries, with DXY around 102.27 driven by a weaker Euro. The Euro underperformed as French fiscal concerns persisted, while the Yen was the relative outperformer, supported by narrower rate differentials and risk-off trade. AUD, NZD and GBP were also weaker against the Buck. Crude settled lower following choppy trade as participants digested conflicting US/Iran developments alongside supply updates. Oil came under pressure after IEA members expressed support for accelerating previously announced stock releases, potentially bringing around 100mln bbls to market, while France announced a 10mln bbl diesel reserve release. US inventory data saw an unexpected crude draw, although production rose to 13.979mln BPD. Post-settlement, the Atlantic reported that Trump could resume attacks on Iran ahead of the election, resulting in some fleeting upside in oil. Meanwhile, earlier reports suggested mediation efforts between the US and Iran have stalled. Meanwhile, both Gold and Silver sold off sharply despite the fall in yields. US FOMC: The minutes revealed that all members - even the non-voters - supported the 25bps rate hike in September, and most assessed another would likely be appropriate by year-end. Participants generally emphasised inflation remained elevated, while the job market appeared near full employment. Participants generally saw inflation risks skewed to the upside, with some seeing those risks becoming more skewed in recent months. Almost all participants saw inflation risks tilted to the upside, while job market risks were broadly balanced. Some participants saw AI buildout possibly causing aggregate demand to outpace supply over the medium term, putting upward pressure on inflation. Regarding Treasury yields, many noted that despite the recent climb in long-term Treasury yields, financial conditions appeared supportive of economic growth. Meanwhile, a few observed that the Treasury market had been functioning smoothly, but noted the importance of planning for market stress. Within the development in Financial Markets section, the minutes noted that changes in real rates contributed to most of the net increase in longer-maturity Treasury yields. Part of the increase reflected the higher expected path of monetary policy and the strength of economic data. Market commentary pointed to geopolitical developments, uncertainty related to the US Treasury's announcement and implementation of the buyback program, and competition for capital from heavy private debt issuance to finance the development of AI infrastructure as also contributing to higher term premiums and Treasury yields. Meanwhile, regarding Japanese intervention, it acknowledged that the desk, acting purely as fiscal agent for the U.S. Treasury, intervened in the currency market using U.S. Treasury funds; the System Open Market Account portfolio was not involved.   NY FED SCE: Median inflation expectations among consumers ticked higher for the 1- and 3-year to 3.9% (prev. 3.6%) and 3.3% (prev. 3.2%), respectively. The 1yr figure is the highest level since May 2023. 5yr expectations remained at 3.0%. The mean unemployment expectations fell 0.5% to 43.9%. The mean perceived probability of losing one’s job in the next twelve months dropped to 13.5% (prev. 13.8%), the lowest reading since December 2024. Elsewhere, expected growth in household income rose 3.1% (prev. 3.0%), the highest level since February 2025. Perceptions and expectations about households’ financial situations both deteriorated, with households expecting a worse financial situation a year from now. FIXED INCOME T-NOTE FUTURES (Z6) SETTLED HALF A TICK LOWER AT 104-15+ T-notes pare initial downside as oil falls from peaks and following another stellar 10-year auction. At settlement, 2-year -2.8bps at 4.770%, 3-year -1.1bps at 4.913%, 5-year -0.9bps at 5.027%, 7-year -0.3bps at 5.153%, 10-year unchanged at 5.286%, 20-year +1.3bps at 5.715%, 30-year +0.8bps at 5.669%. THE DAY: Yields were lower on Wednesday, with the curve bull steepening as the front end led the move. The long end was little changed, while the 2-year yield fell c.4bps. Yields had been rising throughout the European session amid ongoing fiscal concerns, with US Treasuries tracking Eurozone debt lower, while oil prices were also rising at the time, adding pressure to the curve. Regarding France, the WSJ reported that the Finance Minister said France was considering issuing more shorter-term debt amid the recent bond-market turmoil. However, the Finance Ministry later stated that there had been no change to its bond issuance strategy, resulting in choppy trade across global fixed income, particularly OATs. Meanwhile, oil prices pared from their peaks after IEA members expressed support for accelerating the oil stock releases announced as part of the collective action in March, potentially bringing around 100mln bbls to the market. The move saw crude reverse from its highs to ultimately settle in the red. In turn, T-notes moved higher, predominantly at the front end. Another leg higher was seen following a stellar 10-year T-note auction. Overall, the auction saw excellent demand across the key metrics, with the 1.7bp stop-through, strong B/C, elevated indirect participation and exceptionally low dealer takedown particularly impressive. The substantially higher outright yield appears to have helped attract demand, with the 5.300% high yield some 47bps above last month's auction and 74bps above the six-auction average. The fact that this was also the final 10-year auction before the November midterms may have added to the appeal of locking in current yields, although that is harder to establish directly from the auction data. FOMC Minutes were a non-event. On yields, the release noted that changes in real rates contributed to most of the net increase in longer-maturity Treasury yields. Supply Notes US sold USD 39bln of 10-year notes; Stop through 1.7bps. US to sell USD 22bln 30-year bonds on October 8th; all to settle on October 15th Bills US sold 17-wk bills at a high rate of 4.105%, B.C 3.10x US Treasury to sell USD 110bln of 4-week bills and USD 105bln of 8-week bills on October 8th; all to settle October 13th STIRS / OPERATIONS Fed Hike Pricing via CME FedWatch: Oct 4.3bps (prev. 4.9bps), Dec 24.1bps (prev. 25.5bps) EFFR at 3.88% (prev. 3.88%), volumes at USD 120bln (prev. USD 121bln) on October 6th SOFR at 3.90% (prev. 3.89%), volumes at USD 2.997tln (prev. USD 3.007tln) on October 6th NY Fed RRP op demand at 2.34bln (prev. 0.41bln) across 15 counterparties (prev. 16) on October 7th US Treasury to buy back up to USD 6bln of 20-30-year nominal coupons in a liquidity support operation on October 8th (prev. USD 6bln) CRUDE WTI (X6) SETTLED USD 1.16 LOWER AT 88.28/BBL; BRENT (Z6) SETTLED USD 0.38 LOWER AT USD 100.20/BBL The crude complex was choppy, but ultimately settled lower as participants weighed up supply updates and US/Iran updates. On the former, a Senior Iranian official stated US VP Vance's comments on Iran's nuclear programme are American "ideas and requests", and that US ideas are at odds with Iran's demands. Prior to this, CBS framed Vance's remarks on Tuesday as softening US demands on Iran to end the war, saying Iran must do something "meaningful" to reduce its nuclear enrichment. Moreover, there was the usual rhetoric from Iran that the Strait of Hormuz remains closed and under full control. More recently, Al Hadath reported that mediation efforts between Washington and Tehran have stalled and progress in negotiations is contingent on Iran's response to Trump's demands regarding its nuclear capabilities. On the supply angle, crude benchmarks saw downside amid two reports: 1) First LNG train at Qatar's North Field East expansion project is ready to start, and first gas expected in November; 2) IEA members have expressed support for accelerating the oil stock releases announced in the collective action of March, looking to complete as soon as possible, and would bring c. 100mln barrels to the market. However, Politico reported that the EU will only conduct further releases of oil and diesel reserves after IEA has made it clear such a move would not be damaging to the bloc's energy security. However, France announced it will release 10mln bbls of diesel reserves. In the weekly EIA metrics, crude saw an unexpected draw, in line with the private figures last night, while gasoline saw a surprise build and distillates saw a shallower-than-forecast draw. Overall, weekly crude production was up 24k to 13.979mln. Note, SPR fell 0.8mln to 283mln. EQUITIES CLOSES: SPX -0.27% at 7,798, NDX -0.21% at 31,160, DJI -0.66% at 51,179, RUT -1.27% at 2,794 SECTORS: Industrials -2.14%, Materials -1.53%, Real estate -1.35%, Energy -0.46%, Financials -0.44%, Technology flat, Communication services flat, Utilities flat, Consumer staples flat, Consumer discretionary +0.15%, Health +1.06%. EUROPEAN CLOSES: Euro Stoxx 50 -1.40% at 6,184, Dax 40 -1.41% at 25,091, FTSE 100 -0.79% at 10,459, CAC 40 -1.22% at 7,769, FTSE MIB -2.51% at 49,972, IBEX 35 -1.68% at 19,118, PSI -0.92% at 9,334, SMI +0.14% at 13,808, AEX -0.94% at 1,118 STOCK SPECIFICS: Intel (INTC) CEO said Co. will continue working on Musk's Terafab chipmaking venture. Constellation Brands (STZ) FY midpoint profit view light alongside softer underlying beer demand & reduced op. margin outlook. Frasers Group has built an 8.8% stake in Under Armour (UAA), acquiring 16.6mln shares. Chevron (CVX) to divest ownership interests in Hess Midstream (HESM) & DJ Basin Crude midstream assets; HESM cut FY outlook. SpaceX (SPCX) seeks $40bln financing led by Apollo to fund Nvidia chips. ZIM Integrated Shipping Services (ZIM) raised FY adj. EBITDA & adj. EBIT guidance. Black Hills (BKH) signed agreements through 2048 to supply a planned Google data centre in Wyoming. WeBull's (BULL) China ties create national security risk. Later, WeBull responded, noting its US customer data is stored in the US. Neogen (NEOG) reported strong earnings & raised FY26 guidance. Google (GOOGL) and Unity (U) partner on new AI gaming platform for the next era of interactive entertainment. FX USD was firmer against peers in risk-off trade as further bond volatility sparked renewed US strength. Despite US yields managing to pare the early rise, especially after a strong US 10yr note auction, DXY kept onto its gains, as French fiscal woes continue to drag on EUR performance. FOMC Minutes sparked little reaction, given their backwards-looking nature, the recent soft jobs report, and the more apt remarks we've had since from Fed members. Regarding the JPY intervention in July, the Minutes noted that the manager said the desk, acting purely as fiscal agent for the US Treasury, intervened in the currency market using US Treasury funds; the System Open Market Account portfolio was not involved. Now DXY trades around 102.27, failing to break up Monday's 102.535 high. EUR underperformed as French yields surged higher as markets remain unsatisfied on the fiscal path. Brief relief was found on a WSJ report that the French Finance Minister said they are considering issuing more short-term debt amid bond market turmoil. This was later met with pushback by the Finance Ministry, stating no changes have been made on bond issuance strategy. JPY was today's best performer, marginally firmer VS USD, helped by narrower rate differentials and risk-averse sentiment. On fiscal policy, PM Takaichi said that she would review policies and spending amid elevated yields; meanwhile, Labour Cash Earnings decelerated but still printed firmer-than-expected. USD/JPY trades around 158.01 as hikes remain on the table by year-end.