The latest U.S. PMI data came in unexpectedly strong, showing that the pace of economic activity expansion has been the fastest since 2021. Market expectations for the Fed to keep interest rates high—and even hike further—rose rapidly. Against the backdrop of yields on U.S. Treasuries moving broadly higher and increasing uncertainty around the Iran-Iraq situation, U.S. stocks and the crypto market both weakened in tandem on Wednesday, with Bitcoin briefly falling below $84,000.

Strong PMI hits rate-cut expectations; markets reprice toward rate hikes

The PMI data released by the U.S. on Wednesday came in far above market expectations. The overall pace of economic activity expansion is the fastest since 2021, indicating that business activity remains resilient. After the data was released, the market quickly re-evaluated the Federal Reserve’s future interest-rate path. Expectations for rate cuts cooled further, while bets on rate hikes clearly heated up.

According to CME FedWatch data, the market currently estimates a roughly 30% chance that the Fed will keep the policy rate unchanged at 3.75% to 4.00% at the October meeting, and about a 70% chance of a 25-basis-point hike. Looking ahead to December, the probability of maintaining current rates is only 6.6%. The cumulative probability of a 25-basis-point hike is 38.7%, and the cumulative probability of a 50-basis-point hike reaches 54.7%.

Pricing in the interest-rate swap market has even already reflected about three rate hikes over the next year. Some hedging positions are starting to factor in the possibility of a fourth hike, indicating that concerns about “higher rates staying in place for longer” are intensifying in the market.

U.S. Treasury yields rise across the board, with the 10-year reaching above 5%

Rising expectations for rate hikes quickly transmitted to the bond market, with Treasury yields across maturities surging sharply on Wednesday. The 10-year U.S. Treasury yield rose by about 14 basis points in a day and broke above the 5% threshold; the 5-year yield climbed to the highest level since 2007 during the day; and the 30-year yield also rose to a level not seen since 2004.

Market participants are also starting to focus on the impact of higher interest rates on U.S. fiscal conditions. Strive director James Lavish said that in an environment of downward pressure on the dollar and a continued increase in Treasury supply, investors’ willingness to absorb current yields may decline; the higher the yields, the heavier the interest burden on the U.S. Treasury.

Salt of the Grain believes that while the Fed uses rate hikes to curb inflation, the government faces greater fiscal pressure due to higher financing costs, creating a situation where monetary and fiscal policies effectively constrain each other.

U.S. stocks fall broadly, with technology stocks taking the biggest hit

The rapid rise in yields also weighs on U.S. equities. The Dow Industrial Index fell 0.68% in preliminary trading, the S&P 500 dropped 0.75%, and the Nasdaq fell by as much as 1.1%. Overvalued growth stocks are more sensitive to changes in interest rates, suppressing overall market risk appetite.

On the individual stock front, SK Hynix fell 3%, Amazon dropped 2%, while Meta rose 1% against the trend. Energy stocks were relatively resilient: after several consecutive days of weakness, oil prices rebounded about 2.5%, and energy shares rose in parallel.

Bitcoin falls below $84,000; most crypto reserve stock holdings decline

As risk assets come under pressure, the crypto market also weakens in tandem. After U.S. stock markets opened, Bitcoin accelerated its decline, briefly dropping below $84,000, before consolidating at lower levels. The latest price is around $84,400, down about 2.2% over the past 24 hours.

Crypto-related stocks also generally fell. Strategy (MSTR) dropped 3.07%, BitMine (BMNR) fell 4.52%, BNC slid 3.63%, Coinbase (COIN) fell 1.5%, and Circle (CRCL) declined 3%. Among them, Securitize, which benefits from the SEC’s stock token exemption policy, bucked the trend and surged 10.46%.

Overall, the market is currently facing a mix of factors such as strong economic data, accelerating expectations for rate hikes, a sharp jump in U.S. Treasury yields, and uncertainty surrounding the Iran-U.S. situation. As the rates market reprices, U.S. stocks and crypto assets in the near term will still face heightened volatility pressures.

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