Stock Market Today: Stocks Fall, Yields Jump as Fed Meeting Begins

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U.S. stock futures edged lower again on Tuesday, while Treasury bond yields hit multi-year highs as investors looked ahead to the start of the Federal Reserve’s two-day policy meeting in Washington. .

The odds of a 75 basis point rate hike tomorrow, the third in a row, have been widely cemented by interest rate traders, according to CME Group’s FedWatch.

The Fed’s next steps, however, and the level at which it will begin to consider a “pause” in rate hikes early next year, continues to rise after August’s inflation report more faster than expected from last week and fears that price pressures have embedded themselves in the world’s largest economy.

“Investors are watching the US Federal Reserve’s two-day meeting starting today, where another 75 basis point rate hike is expected, taking the Fed Funds rate to 2.5%, as the central bank continues to chase the runaway inflation rate,” said Mihir Kapadia, CEO of London-based Sun Global Investments.

“The more aggressive monetary policy stoked fears of an impending recession and caused prices for most assets, including bonds and stocks, to fall,” he added. “Corporate earnings this quarter will be a barometer of the health and resilience of the economy and sentiment.”

This concern is being expressed in the bond market, where the yield on 2-year notes is trading at 3.973%, the highest since November 2007, in anticipation of a federal funds rate that could reach 4.5% at the beginning of next year.

The move put the incremental yield, or spread, over benchmark 10-year bonds at around 46 basis points, even though that paper is trading at a high of 3.514% in 2011, raising the outlook for a short-term recession following the Fed’s decision. fight against inflation.

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High bond yields also act as a circuit breaker for equities as yields defy falling dividend yield levels for the S&P 500 and offer an investment alternative for risk-averse fund managers.

The prospect of a hawkish rate signal later this week, with interest rate decisions expected from the Bank of England and the Bank of Japan, was further fueled by a surprise 100bp rate hike on Tuesday. of the Swedish National Bank, which took its key rate to 1.75% this morning in Stockholm.

A faster-than-expected inflation reading in Japan, where core prices hit an 8-year high of 2.8% last month, also raised the prospect of BoJ monetary intervention, the yen now trading at 24-year lows against the dollar. and fueling pressures on import prices.

The moves have had little impact on the greenback so far, with the US dollar index trading near 20-year highs against its global peers at 109.770, but pushing stocks lower in Europe and the United States ahead of the Fed policy debate.

In Europe, the Stoxx 600 fell 0.48% at the start of the Frankfurt session, following a 0.97% gain for the MSCI ex-Japan index in Asia.

On Wall Street, futures tied to the S&P 500 point to an opening bell drop of 17 points while tied to the Dow Jones Industrial Average are priced for a drop of 105 points. Futures linked to the technology-focused Nasdaq point to a downward move of 65 points.

In terms of individual stocks, Ford Motor (F) Shares fell 5% after the automaker warned gummed up supply chains would slash its third-quarter bottom line.

UnitedHealth Group (A H) shares rose slightly, while Change Healthcare (CHNG) jumped 7%, after a federal judge rejected a Justice Department request to block its plan to buy the health-tech group.

Apple (AAPL) Shares edged down 0.44% after the group disclosed plans to raise App Store prices in Europe and Asia.

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