(Bloomberg) — Stocks fell with US equity futures, giving up early gains, as traders braced for another supersized US rate hike amid rising anxiety the Federal Reserve could overtighten and raise the odds of a hard landing.
The Stoxx 600 Index dropped 0.8%, paced by losses on real estate and miners. US equity futures also declined after briefly trading higher, with those on the tech-heavy and rate-sensitive Nasdaq 100 underperforming S&P 500 peers.
The US central bank kicks off its meeting today and is expected to again hike rates by 75 basis points Wednesday, signal rates are heading above 4% and will then pause. The long hold strategy is rooted in the idea the central bank would avoid the disastrous stop-go policy of the 1970s that allowed inflation to get out of hand. Market participants have dialed back expectations of an even larger increase and only two of 96 economists in a Bloomberg survey now predict a full-point move.
“The Federal Reserve is likely tightening policy straight into the teeth of a recession,” Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, wrote in an email. “The stock market’s addiction to Fed easing when stocks decline may be what Jerome Powell is aiming to quash by aggressively hiking rates, in addition to inflation.”
Treasury 10-year yields topped 3.5% while yields on the more policy-sensitive two-year rate hit the highest since 2007 and are poised to crack above 4%, reflecting hard-landing fears.
Meanwhile, in a worrying trend for stocks, real rates — Treasury yields adjusted for inflation — rose to the highest level since 2011. When they were pinned in negative territory during a decade of easy-money policies, real rates had been a key driver of risk-asset rallies.
Markets have fairly priced in yield on the two-year Treasury inching closer to 4% and “it might scratch a bit higher, but not an awful lot at this point,” Peter Kinsella, head of foreign exchange strategy at Union Bancaire Privee Ubp SA, said on Bloomberg Television. It would still be reasonable for the 10-year Treasury yield to go towards 3.5% or 3.7%, “but there’s probably not a lot more juice in that trade,” he said.
In China, banks kept their main lending rates unchanged after the central bank paused its monetary easing and defended a weakening yuan.
Elsewhere, Bitcoin struggled to return to the $20,000 level. Oil slipped below $86 per barrel and gold fell.
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Key events this week:
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US housing starts, Tuesday
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EIA crude oil inventory report, Wednesday
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US existing home sales, Wednesday
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Federal Reserve decision, followed by a news conference with Chair Jerome Powell, Wednesday
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Bank of Japan monetary policy decision, Thursday
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The Bank of England interest rate decision, Thursday
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US Conference Board leading index, initial jobless claims, Thursday
Some of the main moves in markets:
Stocks
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Futures on the S&P 500 fell 0.5% as of 6:09 a.m. New York time
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Futures on the Nasdaq 100 fell 0.6%
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Futures on the Dow Jones Industrial Average fell 0.4%
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The Stoxx Europe 600 fell 0.8%
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The MSCI World index was little changed
Currencies
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The Bloomberg Dollar Spot Index rose 0.2%
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The euro fell 0.2% to $1.0003
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The British pound fell 0.1% to $1.1417
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The Japanese yen fell 0.3% to 143.70 per dollar
Bonds
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The yield on 10-year Treasuries advanced five basis points to 3.54%
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Germany’s 10-year yield advanced nine basis points to 1.89%
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Britain’s 10-year yield advanced 12 basis points to 3.25%
Commodities
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West Texas Intermediate crude fell 0.3% to $85.50 a barrel
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Gold futures fell 0.1% to $1,676 an ounce
More stories like this are available on bloomberg.com
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