NBK: US Treasury Yields Jump to Highest Levels Since 2007

A report issued by National Bank of Kuwait stated that market focus remained on strong economic data, rising Treasury yields, and developments in the geopolitical landscape. At the same time, the US labor market continued to demonstrate its strength, with initial jobless claims falling to 197,000 and remaining near multi-decade lows, reinforcing expectations that the unemployment rate would hold steady at 4.1%. Strong economic activity and persistent inflationary concerns pushed 10-year Treasury yields to approximately 5.11%, reaching their highest level since 2007.

In detail, the US labor market continued to show resilience. New jobless claims in the US remained near their lowest levels in roughly six decades last week, indicating that the labor market has regained strength after a period of slowdown during the summer and has maintained its flexibility despite economic uncertainty linked to tensions in the Middle East. The latest weekly jobless claims report from the Department of Labor pointed to continued stability in the labor market, with expectations that the unemployment rate will remain at 4.1% in September. Additionally, the number of people receiving unemployment benefits stayed close to a three-year low during the period used to calculate the monthly unemployment rate.

Intensified geopolitical tensions in the Middle East have driven up energy prices, with diesel prices reaching record levels. Economists warn that sustained high energy prices could ultimately lead to increased inflation and pressure on economic activity overall. However, recent surveys of business activity indicate the continued robustness of the US economy, as private sector activity grew at its fastest pace in over five years, coinciding with rising price pressures.

National Bank of Kuwait added in its report that 10-year US Treasury yields stabilized at around 5.11%, remaining close to their highest levels since July 2007, after rising by 16 basis points in the previous session. The rise in yields was driven by weak demand in a $70 billion five-year Treasury bond auction, alongside the release of strong US economic data revealing that private sector activity grew in September at its fastest pace in over five years.

Accelerating activity and rising price pressures have heightened concerns about persistent high inflation, while several Federal Reserve officials have continued to support tightening monetary policy. Markets currently price in a 70% probability of the Federal Reserve raising interest rates again in October, up from 55% the previous day. Meanwhile, rising oil prices, amid uncertainty surrounding US-Iran negotiations, have added further pressure to inflation expectations.

Turning to the United Kingdom, the manufacturing sector saw a notable improvement in September. The total order book balance rose to -9 points, compared to -25 points in August, marking its strongest reading since July 2023 and significantly surpassing market expectations of -34 points. Export orders also improved, while the decline in production slowed sharply, with its balance improving to -4 points from -17 points. However, industrial companies still expect a marginal decline in production through December. Expectations for selling prices fell to +12 points from +22 points, indicating some moderation in cost pressures, while finished goods inventories remained at levels that are barely adequate.

The Confederation of British Industry stated that these figures suggest the manufacturing sector is stabilizing, despite ongoing pressures from rising energy, employment, and supply chain costs. The upcoming budget is viewed as an opportunity to support investment and confidence.

Bank of England Governor Andrew Bailey warned that sustained high energy prices could make it more difficult for the central bank to keep interest rates unchanged, reinforcing recent indicators that policymakers may lean toward tightening monetary policy. His comments come as the UK government faces increasing pressure to address rising living costs while maintaining economic confidence ahead of the upcoming budget. Unlike the US Federal Reserve and the European Central Bank, the Bank of England has kept interest rates unchanged since the outbreak of the conflict with Iran. In recent weeks, Bailey and other policymakers at the Bank have expressed growing concerns that the sharp rise in energy prices could entrench inflation at high levels.