US Market Wrap: Stocks and Treasuries sold, while oil surges as Middle East tensions escalate

SNAPSHOT: Equities down, Treasuries down, Crude up, Dollar up, Gold down. REAR VIEW: Yemeni Houthis reportedly on the verge of complete control over the Bab al-Mandab Strait; Iran is reportedly producing ballistic missiles again; Houthis take control of Red Sea City, maintain view that Red Sea navigation isn't safe for Saudi vessels; Very strong US 30yr auction; ECB hikes rates by 25bps as expected; US admin yet to decide on refined copper tariffs; US Existing Home Sales decline as expected; Chinese AI chipmakers have reportedly lifted prices amidst higher memory prices. COMING UP: Data: UK GDP (Jul), US CPI (Aug), US University of Michigan Survey Prelim (Sep). Events: IEA OMR, CBR Announcement. Speakers: US President Trump; ECB’s Lagarde, Lane. Supply: Australia. Earnings: Kroger MARKET WRAP US indices were lower on Thursday, as surging oil prices dictated price action across markets, seeing Treasury yields soar, the Dollar strengthen, and weighing on spot gold. Highlighting the move in yields, the 30yr hit 5.366%, the highest since 2007, while the 10yr topped out at 4.954%, a peak since November 2023. Focus resided around the Bab al-Mandeb Strait, and saw the crude complex see gains of c. USD 7/bbl as Iranian media reported that the Houthis are nearing complete control of the strategic waterway, followed by reports of control over Zaqar and Mayun islands and the Al-Omari military base as well as the cities Al Mukha and Mocha. Given these heightened tensions in the US/Iran war, the Dollar gained to the detriment of all G10 FX peers, as Antipodeans lagged on said risk tone, while Yen also lost out to see USD/JPY hit a high of 154.67, as desks await BoJ next week. Geopolitics dominated the tape, but US PPI was a mixed report and garnered limited reaction, as traders await the pivotal CPI metrics on Friday, which will likely dictate what the Federal Reserve do in the September confab. Precious metals saw pressure, although spot silver saw much greater losses than its counterpart. US sectors closed mainly in the red, with Technology and Materials lagging as the latter is weighed on by copper names weaker as the US admin is yet to decide on refined copper tariffs amid concerns that higher prices could raise manufacturing costs. Memory names were weighed following reports that the DeepSeek V4.1-flash has cut agent memory costs fourfold with new architecture. In the Treasury space, the 30-yr bond auction was stellar, while the 10-20year Treasury buyback operation saw little sustained reaction (more details below). Ahead, Oracle earnings after-hours await before the aforementioned CPI on Friday and any further Middle East updates. US DATA US PPI: The PPI report was mixed. Headline PPI rose 0.4% M/M, in line with the consensus and accelerating from the prior 0.1% increase (revised from 0.0%), while the Y/Y rate accelerated to 5.4%, above the 5.3% forecast and the prior 4.8%. The core metrics were more encouraging, with core PPI rising 0.2% M/M, below the 0.3% forecast and prior. Core PPI rose 4.6% Y/Y, in line with expectations but accelerating from the prior 4.3%. The report noted that more than three-quarters of the broad-based increase in final demand goods prices could be attributed to energy, which rose 4.2%. More than a third of the August increase in final demand goods prices was attributable to diesel fuel, while the indices for gasoline, jet fuel, home heating oil, candy and nuts, and tobacco products also advanced. In contrast, residential electric power prices fell 0.5%, while fresh sausage and aluminium mill shapes also declined. Services prices rose a more modest 0.1% M/M, primarily due to a 2.3% increase in transportation and warehousing services. Conversely, the index for final demand trade services fell 0.2%, while prices for final demand services less trade, transportation and warehousing were unchanged. Looking at the PPI components that feed into PCE, portfolio management prices declined, while air passenger transportation prices increased modestly following the prior decline, and the healthcare components were mixed. Pantheon Macroeconomics highlighted that most of the relevant components rose only modestly, although the 0.7% increase in air passenger transportation PPI points to a 2.3% rise in the corresponding seasonally adjusted PCE measure. Pantheon also noted that "hospital prices rose by 0.6%, twice their average monthly increase over the previous 12 months." Attention now turns to Friday's US CPI report, which will be pivotal in further shaping Fed rate expectations ahead of next week's meeting. Following last week's strong US jobs report and the sharp rise in oil prices this week, markets are currently assigning around a 70% probability of a 25bps September rate hike. Friday's CPI report could materially shift those expectations, with a cooler print likely to bolster the case for a hold, while a hot report would reinforce expectations for a hike. Although the CPI data is still to come, Pantheon Macroeconomics writes that "a core PCE increase of between 0.20% and 0.25% looks most likely." JOBLESS CLAIMS: Initial Jobless Claims (w/e Sept 5th) were little changed at 206k from 207k, against the expected 205k; 4-wk average ticked lower to 206k from 207.5k. Continuing claims (w/e Aug. 29th) printed 1.774mln (prev. 1.775mln), slightly shy of the forecasted 1.780mln. For initial claims, unadjusted data expected 177k, +3% W/W, while the seasonal factors had expected an increase of 3.4% W/W. Looking at the unadjusted metrics, the biggest rises were in California (+2,221), Michigan (+2,149), and Washington (+935), with New York (-3,571) the notable decliner. Overall, the data set remained in recent ranges and continues to be consistent with a low pace of layoffs and a labour market. EXISTING HOME SALES: Existing home sales fell 2% in August to 3.98mln from 4.06mln, in line with expectations; M/M sales held steady in the West and declined in the Northeast, Midwest and South. Inventory of homes for existing home sales was 1.62mln units, 4.9months' worth, rising from last months 4.6 months, and as such the highest since 2015. Median existing home prices were USD 429.1k, +1.6% Y/Y, vs. USD 434.1k in July. NAR Chief Economist Yun said, “Mortgage rates and home sales move in opposite directions, so it's not surprising to see a mild dip in home buying activity due to high mortgage rates”. Yun added, “Still, home prices are rising, and existing home sales are actually up 1.6% year-to-date through the first eight months of the year." FIXED INCOME T-NOTE FUTURES (Z6) SETTLED 23 TICKS LOWER AT 106-11+ Treasury yields rally, particularly in the front end, as oil advances on escalating Middle East tensions. At settlement, 2-year +12.9bps at 4.565%, 3-year +13.3bps at 4.663%, 5-year +12.6bps at 4.746%, 7-year +12.1bps at 4.847%, 10-year +11.2bps at 4.957%, 20-year +9.5bps at 5.391%, 30-year +8.0bps at 5.373%. THE DAY: The Treasury curve bear flattened on Thursday, led by the front end as inflation concerns intensified alongside another surge in crude prices. WTI rallied back above USD 100/bbl, with the latest upside occurring amid an escalating situation around the Bab al-Mandeb Strait. Reports throughout the morning suggested that the Houthis are close to gaining complete control of the Strait after taking control of the city of Al Mukha. Reports also suggested they are taking control of Zaqar Island, Mayun Island and the Al-Omair military and strategic base, which overlooks the Strait. The surge in oil prices reignited inflation concerns and drove a pronounced sell-off at the front end, with the 2-year yield rising around 13bps to c. 4.57%, while the 30-year yield rose around 8bps to 5.37%. The latter marked its highest level since 2007 and returned the long-end yield to around the levels seen when Treasury announced it would at least double the size of its long-end buyback operations. The 30-year bond auction was very strong. The 2.7bp stop-through, significantly above-average bid-to-cover, exceptional indirect demand and extremely low dealer allocation point to a very strong reception, likely supported by the historically elevated outright yield. The 10-20yr buyback operation didn’t see a notable reaction (details below). Elsewhere, the US PPI report was mixed but broadly in line overall. Headline PPI rose 0.4% M/M, in line with the consensus and accelerating from the prior 0.1% increase (revised from 0.0%), while the Y/Y rate accelerated to 5.4%, above the 5.3% forecast and prior 4.8%. The core metrics were more encouraging, with core PPI rising 0.2% M/M, below the 0.3% forecast and prior, while the Y/Y rate rose to 4.6%, in line with expectations but accelerating from 4.3%. Meanwhile, the ECB hiked rates by 25bps as expected in a unanimous decision and maintained its non-committal guidance. Meanwhile, its 2027 HICP inflation forecast was raised, although the projection was lower than some desks had expected. Later sources suggested further tightening is likely, with an October hike in play. SUPPLY Notes US sold USD 22bln of 30-bonds; US to sell USD 13bln of 20yr bonds on September 15th; to settle on Sept. 18th; to sell USD 19bln of 10yr TIPS on Sept. 17th; to settle on Sept. 30th Bills US sold 4-week bills at a high rate of 3.775%, B/C 2.81x; sold 8-week bills at a high rate of 3.845%, B/C 2.82x US to sell USD 92bln of 13-wk bills and USD 79bln of 26-wk bills on Sept. 14th, to sell USD 75bln of 6-wk bills on Sept. 15th. STIRS / OPERATIONS Fed Hike Pricing via CME FedWatch: Sept. 17.5bps (prev. 15.3bps), Dec 41.7bps (prev. 36.7bps) EFFR at 3.63% (prev. 3.63%), volumes at USD 110bln (prev. USD 107bln) on September 9th. SOFR at 3.64% (prev. 3.64%), volumes at USD 2.859tln (prev. USD 2.904tln) on September 9th. NY Fed RRP op demand at 4.736bln (prev. 0.432bln) across 4 counterparties (prev. 6) on September 10th. Treasury Buyback [Liquidity Support, 10yr-20yr, max USD 6bln]: Accepts USD 5.187bln of 10.489bln offered, accepts 23 of 40 eligible securities. Offer to cover 2.022x. CRUDE WTI (V6) SETTLED 6.43 HIGHER AT USD 102.48/BBL; BRENT (X6) SETTLED USD 6.42 HIGHER AT USD 107.63/BBL The crude complex surged, with WTI breaching USD 103/bbl and Brent USD 108/bbl as the US/Iran war intensifies. Focus on Thursday resided around the Bab al-Mandeb Strait, and saw benchmarks soar higher throughout the duration of the US session, and to settle around highs. Iranian media reported that the Houthis are nearing complete control of the strategic waterway, followed by reports of control over Zaqar and Mayun islands and the Al-Omari military base as well as the cities Al Mukha and Mocha. Oil rallied amid the prospect of disruption around another key global shipping route added to existing Hormuz woes. Sparking some brief modest paring of gains was a Houthi spokesperson noting "regarding freedom of navigation and international trade in the Red Sea and Bab al-Mandab, these are safe and proceeding normally, and there is no need for any international concern". Furthermore, initial intraday highs were seen as WSJ reported that Iran resumes ballistic missile production. Away from the Middle East, the weekly EIA data saw crude oil stocks see a slightly shallower draw than anticipated, while both distillates and gasoline saw a surprise build. EQUITIES CLOSES: SPX -0.58% at 7,592, NDX -1.08% at 29,104, DJI -0.61% at 52,069, RUT -1.04% at 2,891 SECTORS: Materials -1.48%, Utilities -1%, Technology -0.94%, Real estate -0.86%, Industrials -0.7%, Health -0.53%, Consumer discretionary -0.45%, Energy -0.43%, Financials -0.3%, Communication services +0.25%, Consumer staples +0.25%. EUROPEAN CLOSES: Euro Stoxx 50 -0.66% at 6,270, DAX 40 -0.69% at 25,401, FTSE 100 -0.57% at 10,609, CAC 40 -0.49% at 8,117, FTSE MIB -0.13% at 51,807, IBEX 35 -0.18% at 19,660, PSI +0.11% at 9,456, SMI -0.47% at 13,740, AEX -0.78% at 1,093 STOCK SPECIFICS: US admin is reportedly yet to decide on refined copper tariffs amid concerns that higher prices could raise manufacturing costs. Of note for FCX, TECK, SCCO. Cooper Companies (COO): Rev. missed; lowered FY26 outlook and Q4 guide was light. AeroVironment (AVAV): EPS & rev. beat. Macy's (M): FY26 rev. outlook missed. Centrus Energy (LEU) announced class A common stock & warrant offering. Tenable (TENB) to offer USD 650mln of convertible senior notes due 2031. Meta (META) AI researcher Andrew Tulloch is leaving to go to Anthropic, reports WSJ. Uber (UBER) CEO carried out an open market purchase of 141,000 shares at avg price of USD 70.9642/shr on September 10th. DeepSeek V4.1-flash cuts agent memory costs fourfold with new architecture. FX USD was firmer on Thursday, back to tracking US yields and oil higher, as new YTD highs in all durations of notes/bonds issued strong support for the dollar. Oil prices dominated price action across assets, as Houthis' expansion into Yemen and the Red Sea leaves it posing a greater threat towards Saudi vessels in the key waterway. Elsewhere, a mixed PPI places greater significance on Friday's CPI report to dictate the Fed decision in September - Core Y/Y and headline M/M matched exp., core M/M slightly cool, headline Y/Y slightly hot. Initial and continuing claims were little changed W/W, signalling a continuation of the low fire/hire labour market. DXY hit highs of 99.199 before trimming to around 99.057 EUR/USD traded lower on the rally in Brent and TTF futures. As mentioned, broad USD strength and a rise in global yields weighed on G10FX. Meanwhile, the ECB's decision to hike rates by 25bps was met with a limited reaction, given the decision was expected. The statement didn't provide any clear forward guidance, but on inflation, it stated that it will remain well above target for an extended period. In the press conference, Lagarde stated that there was no debate of any kind on the future rate path, and that the decision to hike was unanimous. Overall, the ECB announcement and following commentary were as expected, and the downside seen in EUR/USD throughout the event was a result of USD strength, as the pair fell to a 1.1592 low before rebounding to around 1.1610. USD/NOK wiped out the last two days of losses, helped by said USD strength and a softer-than-expected Norway inflation report. Core inflation M/M fell 0.5% (exp. -0.4%), with the headline figure Y/Y in line with expectations.