S&P Global's flash survey showed the fastest growth in five years and the steepest cost increases in four. Twenty minutes later, a Fed governor said more rate increases are likely needed.
The bond market received two pieces of news within 20 minutes on Wednesday morning, and both pointed the same way.
At 9:45 a.m. Eastern, S&P Global's flash survey of U.S. purchasing managers showed business activity growing at its fastest pace in more than five years. The composite output index rose to 58.4 in September from 56.0 in August. The services gauge climbed to 58.7 from 56.5, and the manufacturing index jumped to 57.0 from 53.9. Any reading above 50 signals expansion.
"US business continues to boom, with output growing at the fastest rate for over five years in September," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The details were hotter than the headline. Employment rose at the fastest pace since June 2022. New orders at service providers reached their highest level since March 2022, and factory orders their highest since April 2022. Input costs rose at the steepest rate in four years. "Firms' input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices," Williamson said.
Shortly after 10 a.m., Federal Reserve Governor Michael Barr told a Chicago Fed conference that the central bank's work was unfinished. "In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion," he said. He added that "risks to achieving our inflation target have increased, while risks to the labor market have receded."
Treasury yields jumped when the survey was released and kept climbing through the session. The 10-year yield rose about 16 basis points to roughly 5.13%, its highest level since July 2007. The two-year yield climbed to about 4.91%, its highest since 2024. Traders in fed funds futures lifted the probability of a quarter-point hike at the Oct. 27-28 meeting to about 70%, up from 55% a day earlier and less than 10% a month ago.
Stocks gave ground. The S&P 500 fell 0.7% and the Nasdaq Composite lost 1.1%, a day after the Nasdaq closed at a record. The Dow Jones Industrial Average dropped about 320 points.
For most of the past month, the case for a Fed that could soon stop hiking has leaned on oil. The central bank raised rates last week for the first time since 2023 as the war with Iran pushed energy prices higher, and this week's direct U.S.-Iran talks briefly pulled Brent crude below $100. Wednesday's survey measured demand. It showed companies hiring and booking orders at the fastest pace in years, even as fuel and transport costs climbed.
Two readings fit the day. In one, the Fed's inflation problem has broadened beyond energy, and Barr's remarks are a signal that more hikes are coming whatever happens to crude. In the other, a single flash survey and a single governor's speech are a thin base for a new policy path. Flash readings are preliminary and can be revised. Barr is one voice among 18 officials, and Fed Chair Kevin Warsh has declined to offer forward guidance.
Other officials have struck similar notes. Boston Fed President Susan Collins wrote that there is "an increased likelihood" inflation stays "notably" above the 2% target. Chicago Fed President Austan Goolsbee said the Fed may need to treat the energy shock as a persistent source of inflation. "So we better be careful," he said.
Last week's decision lifted the federal funds rate to a range of 3.75% to 4.00%, and 16 of 18 officials signaled at least one more increase before year-end. The next checks on Wednesday's story arrive fast: weekly jobless claims and new home sales on Thursday, durable goods orders on Friday, and then the October meeting itself.