Stocks fell Wednesday and Treasury yields ticked up after oil jumped above $100 a barrel, reheating concerns about inflation that could push the Federal Reserve to hike interest rates.
The Dow Jones Industrial Average fell 367 points, or 0.7%, by approximately 10:00 a.m. ET, while the S&P 500 and Nasdaq slumped 0.3% each.
Brent crude oil futures jumped 2.9% to $100.77 a barrel Wednesday morning – passing the $100 level for the first time since July – while West Texas Intermediate rose 2.9% to $95.73.
As investors feared a prolonged Middle East conflict could keep energy prices elevated and push inflation even higher, the US 10-year Treasury yield briefly ticked up to 4.806% – passing the closely-watched 4.8% level – and the 2-year Treasury yield jumped to 4.415%.
Lawrence Gillum, chief fixed income strategist for LPL Financial, said the rapid bond sell-off signals traders are preparing for an interest-rate hike at the Fed’s Sept. 16 meeting.
“A gap of roughly 60 to 85 basis points between the federal funds target range and the 2-year Treasury yield is the market telling you it expects the next move to be a hike, not a cut,” Gillum wrote in a note.
“We still think the bar for a hike is higher than a Fed on hold, but with probabilities hovering near 50%, the risk that the market will force Fed action is not off the table,” he added.
Renewed hostilities amid the war with Iran stoked concerns that energy supply disruptions could last months longer, as the Strait of Hormuz – a vital maritime route for 20% of the world’s oil – is caught between the warring nations.
US Central Command said late Tuesday that American forces had destroyed five Iranian oil tankers near Kharg Island, Tehran’s energy hub, in the latest escalation as it attempts to squeeze the nation’s economy.
In the meantime, national average gasoline prices at home have remained stubbornly high, climbing to $4.22 a gallon as of Wednesday, according to AAA.
Major stock indexes also fell Tuesday to start the shortened trading week after the Labor Day holiday as Treasury yields increased.
Investors and economists are anxiously awaiting fresh inflation data, with the Producer Price Index scheduled for release on Thursday and the Consumer Price Index due on Friday.
It’s the last batch of economic data the Federal Reserve will get before it makes its interest rate decision next week – a crucial call that could impact the upcoming midterm elections as Americans grow increasingly frustrated with affordability issues.
The war with Iran recently hit the six-month mark and tensions between the two nations have only heated up.
Energy Secretary Chris Wright has warned Washington may not be able to reach a nuclear agreement with Tehran.
But Trump administration officials have insisted that oil and gasoline prices will quickly fall once overseas hostilities come to an end.
Treasury Secretary Scott Bessent recently said oil could sink as low as $40 to $50 a barrel if the Strait of Hormuz is fully reopened, while President Trump said gas prices will drop to $3 and eventually $2 a gallon “when we WIN the war with Iran.”