U.S. stocks started the week cautiously, and yields on government debt rose as investors expected additional monetary policy tightening from the Fed.
The broad S&P 500 index rose 0.2 percent on Wall Street late in the morning, while Europe’s region-wide Stoxx 600 index fell 0.7 percent. The S&P had previously dropped as much as 0.9 percent.
The yield on the 10-year U.S. government debt, an indicator for global borrowing costs, rose above 3.5 percent for the first time since 2011 and then fell to 3.47 percent as investors sold the bonds.
Monday’s underperformance came after MSCI’s broad index of advanced and emerging market shares fell 4 percent last week in its biggest weekly drop since June. Concerns about the health of the global economy and the prospect of larger rate hikes from major central banks frightened investors.
“This feels like a make-or-break week. There’s residual anxiety from the repricing we’ve had last week, and there’s no sense that the sentiment is turning into something better,” said Samy Chaar, chief economist at Lombard Odier.
In currencies, the dollar rose about 0.3 percent against a basket of other currencies. strong volatility in recent months Supported by rising US interest rates. The rising dollar hit sterling, which fell below $1.14.
“The money market probably best sums up how close we are to some kind of breaking point,” Chaar said. “The big question will be whether we’ll get a positive signal from central banks about when the walking cycle will peak . . . you don’t see many ways the Fed can 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 forecasts for a third consecutive increase of this magnitude were bolstered by data last week showing that US consumer price inflation cooled less than forecast in August.
Pricing based on federal funds futures shows the Fed will raise the main interest rate to 4.4 percent in the first months of 2023, from the current 2.25 to 2.5 percent range, as policymakers seek to cool down inflation.
Fears are growing among investors that the central bank’s efforts to reduce inflation through monetary tightening will plunge the U.S. economy into recession as debt service costs for companies and individual borrowers rise.
The yield on 10-year inflation-linked US notes, which shows the returns investors can expect to receive after calculating inflation, reached 1,159 percent, the highest since 2018. So-called real returns were initially around minus 1 percent. It flatters the valuations of fast-growing tech companies that dominate US stock indexes.
The Japanese yen fell 0.3 percent to 143 yen against the dollar after hitting a 24-year low last week before the government stepped up its verbal intervention to calm the country’s currency market.
The Bank of Japan will make its final policy decision on Thursday. Most economists expect the BOJ to continue keeping 10-year bond yields near zero as it tries to revive more resilient inflation in an economy going through decades of tepid price growth.
The Bank of England will also announce its decision on interest rates on Thursday and there is a consensus forecast among City of London analysts pointing to an increase of 0.5 percentage points.
Asian stocks also fell, and MSCI shares in the region fell 0.4 percent. Stock markets in the UK and Japan were closed for public holidays.
