Stocks Fall as Traders Watch for Superb Fed Rise: Markets Pack

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(Bloomberg) — Stocks fell, giving up early gains as traders braced for another super-sized US rate hike amid mounting fears that the Federal Reserve could overtighten and increase the likelihood of a hard landing.

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The Stoxx 600 Index fell 0.4%, accelerated by losses on real estate and miners. US stock futures also fell, with those on the tech-heavy and price-sensitive Nasdaq 100 underperforming S&P 500 peers.

The US central bank kicks off its meeting today and is expected to hike rates again by 75 basis points on Wednesday, the signal rate rises above 4% and then pauses. The long-hold strategy is rooted in the idea that the central bank would avoid the disastrous stop-go policies of the 1970s, which allowed inflation to spiral out of control. Market participants have rolled back expectations of an even bigger rise, and only two of 96 economists in a Bloomberg survey are now forecasting a full-scale move.

“The Federal Reserve is likely tightening its policies against a backdrop of recession,” Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, wrote in an email. “The stock market’s addiction to the Fed’s easing when stocks fall may be what Jerome Powell is trying to counter by aggressively raising rates in addition to inflation.”

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The 10-year government bond yield hovered around 3.5%, while the yield on the more policy-sensitive two-year yield reached its highest level since 2007 and is poised to climb above 4% on fears of a hard landing.

Swap contracts predicting yields for the next two years are now peaking at around 4.5% in March 2023 – a full point higher than expected after the last meeting in July.

Markets have reasonably priced in the yield on the two-year Treasury bonds approaching 4% and “it could scratch a little higher, but not much at the moment,” Peter Kinsella, head of currency strategy at Union Bancaire Privee Ubp SA, said on Bloomberg Television. It would still be reasonable for 10-year Treasury yields to move towards 3.5% or 3.7%, “but there probably isn’t much left in that trade,” he said.

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In China, banks kept their key lending rates unchanged after the central bank paused its monetary easing and defended a weakening yuan.

Elsewhere, Bitcoin struggled to bounce back to the $20,000 level. Oil fell below $86 a barrel and gold fell.

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Main events this week:

  • US housing starts, Tuesday

  • EIA Crude Oil Inventory Report, Wednesday

  • US Existing Home Sales Wednesday

  • Federal Reserve decision, followed by press conference with Chairman Jerome Powell, Wednesday

  • Bank of Japan monetary policy decision, Thursday

  • The Bank of England’s interest rate decision, Thursday

  • US Conference Board Leading Index, First Jobless Claims, Thursday

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Some of the key moves in markets:

Shares

  • The Stoxx Europe 600 fell 0.4% as of 10:19 AM London time

  • Futures on the S&P 500 fell 0.3%

  • Nasdaq 100 futures fell 0.5%

  • Dow Jones Industrial Average futures fell 0.2%

  • The MSCI Asia Pacific Index rose 0.7%

  • The MSCI Emerging Markets Index rose 0.9%

currencies

  • The Bloomberg Dollar Spot Index rose 0.2%

  • The euro fell 0.2% to $1,007

  • The Japanese yen fell 0.4% to 143.76 per dollar

  • The offshore yuan fell 0.3% to 7.0227 per dollar

  • The British pound had changed little at $1.1427

bonds

  • 10-Year Treasury yield rose four basis points to 3.53%

  • German 10-year yield rose by nine basis points to 1.90%

  • British 10-year yield rose 10 basis points to 3.23%

Raw materials

  • Brent oil rose 0.7% to $92.60 a barrel

  • Spot gold fell 0.5% to $1,667.80 an ounce

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