Stocks Decline as Traders Eye Supersized Fed Hike: Markets Wrap

admin September 20, 2022

(Bloomberg) — Stocks fell, 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.

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The Stoxx 600 Index dropped 0.4%, paced by losses on real estate and miners. US equity futures also declined, 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 hovered near 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.

Swap contracts that forecast rates over the next two years now peak around 4.5% in March 2023 — a full point higher than was expected after the last meeting in July.

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:

US housing starts, Tuesday
EIA crude oil inventory report, Wednesday
US existing home sales, Wednesday
Federal Reserve decision, followed by a news conference with Chair Jerome Powell, Wednesday
Bank of Japan monetary policy decision, Thursday
The Bank of England interest rate decision, Thursday
US Conference Board leading index, initial jobless claims, Thursday

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 fell 0.4% as of 10:19 a.m. London time
Futures on the S&P 500 fell 0.3%
Futures on the Nasdaq 100 fell 0.5%
Futures on the Dow Jones Industrial Average 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 $1.0007
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 was little changed at $1.1427

Bonds

The yield on 10-year Treasuries advanced four basis points to 3.53%
Germany’s 10-year yield advanced nine basis points to 1.90%
Britain’s 10-year yield advanced 10 basis points to 3.23%

Commodities

Brent crude rose 0.7% to $92.60 a barrel
Spot gold fell 0.5% to $1,667.80 an ounce

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