US stock futures edged lower on Thursday evening, and stocks later pared gains, as investors grappled with high 10-year Treasury yields, which reached their highest level since 2007, and a sharp increase in crude oil prices. These factors raised concerns about inflation and the likelihood of further interest rate hikes by the Federal Reserve. The 10-year Treasury yield, after jumping over 20 basis points in the preceding two sessions, slipped one basis point to 5.19%. The rate-sensitive two-year yield declined two basis points to 4.91%. Gold held steady around $4,270 an ounce.
Adding to market pressures, the University of Michigan's final September consumer sentiment index remained at 47.8, marking the second-lowest reading in the survey's 70-year history, trailing only May 2026's record low. This decline, down 3.9 points from August's 51.7, was attributed to the Federal Reserve's recent rate hike and crude oil prices exceeding $100 per barrel. Year-ahead inflation expectations climbed to 4.6% from 4.0% in August, indicating growing consumer anxiety about rising prices. The Federal Reserve raised its benchmark rate by 25 basis points to 3.75%-4.00% in September, its first hike since 2023, and signaled at least one more increase before year-end.
The Consumer Expectations Index saw a significant drop of 15.7% to 45.8, a much steeper decline than the 1.9% easing in the Current Economic Conditions Index to 50.9. This divergence suggests that consumers anticipate a worsening economic environment ahead. West Texas Intermediate crude oil peaked above $105 per barrel in late August and early September before moderating to the mid-$90s range. However, elevated gasoline costs continue to weigh heavily on consumer sentiment. The S&P 500 and Nasdaq traded under pressure, reflecting investor reassessments of fourth-quarter consumption-driven earnings assumptions. Companies like Stitch Fix, despite reporting better-than-expected quarterly results, saw its stock tumble 21.6% due to a "more challenging consumer environment.
Timothy Moe, Chief APAC Regional Equity Strategist at Goldman Sachs Group Inc., commented that markets are likely to remain volatile in the near term due to US midterm elections, interest rates, higher energy prices, and geopolitical risks. However, he foresees a clear roadmap towards a rally at the end of the year, driven by earnings and attractive valuations. Rajeev De Mello, a global macro portfolio manager at Gama Asset Management, suggested that the bond market is due for a period of consolidation after such a rapid rise in yields, and he would prefer a more sustained period of stability before becoming more constructive on duration.
Historical data suggests that consumer sentiment can recover within one to two quarters if external shocks, such as energy costs and interest rates, stabilize or reverse. A sustained crude oil pullback below $90 per barrel and a potential Fed pause after a fourth-quarter hike would provide the most direct relief. Conversely, a rebound in oil prices and another 25-basis-point rate hike from policymakers could push the sentiment index to retest or even fall below May's record low.
