US stocks slip and Treasury yields rise ahead of key Fed meeting

US stocks fell on Monday and government debt yields rose as investors priced in the prospect of further monetary policy tightening from the Federal Reserve.

The broad S&P 500 index fell 0.8% in morning trade on Wall Street, while the European regional Stoxx 600 fell 0.6%.

The yield on US 10-year government debt, a benchmark for global borrowing costs, rose above 3.5% for the first time since 2011 as investors sold the bonds.

Monday’s dismal performance comes after the broad MSCI index of developed and emerging market stocks lost 4% last week in its biggest weekly decline since June. Concerns about the health of the global economy and the specter of further large rate hikes from major central banks spooked investors.

“It looks like a breakthrough week. There is residual anxiety from the price revision that we experienced last week and there is no sense that sentiment is turning to anything better,” said Samy Chaar, chief economist at Lombard Odier. .

In currencies, the dollar appreciated by around 0.4% against a basket of other currencies, extending strong growth in recent months which had been fueled by rising interest rates in the United States. The surge in the greenback hit the British pound, which weakened to less than $1.14.

“The currency market probably best sums up how close we are to some sort of breaking point,” Chaar said. “The big question will be whether we get a positive signal from central banks as to when their bull cycle peaks. . . You don’t see a lot of avenues where the Fed could be reassuring.

The consensus expectation on Wall Street is that the Fed will raise interest rates by 0.75 percentage points at the end of its two-day meeting on Wednesday. Market expectations for a third consecutive rise of this magnitude were bolstered last week by data showing that consumer price inflation in the United States cooled less than expected in August.

Pricing based on fed funds futures suggests the Fed will raise its main interest rate to 4.4% in the early months of 2023 from the current range of 2.25-2.5% as policy makers are trying to rein in inflation.

Investors are increasingly concerned that the central bank’s efforts to tame inflation through monetary tightening could push the U.S. economy into recession as debt servicing costs rise for businesses and individual borrowers .

The yield on US 10-year inflation-linked bonds, which indicate the returns investors can expect to receive after accounting for inflation, hit 1.159%, the highest since 2018. saying real returns were around minus 1% at the start. of the year, flattering the valuations of fast-growing technology companies that represent a significant weight on US stock indices.

The Japanese yen slipped 0.3% to ¥143 against the dollar after hitting a 24-year low last week before the government stepped up verbal intervention aimed at easing the country’s foreign exchange market.

The Bank of Japan is expected to make its final policy decision on Thursday. Most economists expect the BoJ to keep 10-year bond yields near zero as it tries to stoke more sustainable inflation in an economy that has weathered decades of sluggish price growth.

The Bank of England is also expected to announce its interest rate decision on Thursday, with consensus forecast from City of London analysts pointing to a 0.5 percentage point hike.

Asian stocks also declined, with an MSCI gauge of stocks in the region down around 0.5%. Stock markets in the UK and Japan were closed for public holidays.

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