US stocks fell on Monday and government bond yields rose as investors anticipated the prospect of further monetary policy tightening by the Federal Reserve.
The broader S&P 500 index fell 0.8 percent in morning trading on Wall Street, while the European region’s Stoxx 600 fell 0.6 percent.
The yield on 10-year US government debt, a benchmark for global borrowing costs, topped 3.5 percent for the first time since 2011 when investors sold the bonds.
Monday’s dismal performance comes after the broad MSCI index of developed 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 specter of further rate hikes by major central banks have spooked investors.
“This feels like a make or break week. There is residual anxiety from the price revision we went through last week and it doesn’t make any sense that sentiment is changing for the better,” said Samy Chaar, chief economist at Lombard Odier.
In currencies, the dollar rose 0.4 percent against a basket of other currencies, widening a strong increase in recent months which had been fueled by rising US interest rates. The soaring dollar hit sterling, which weakened below $1.14.
“Forex probably best sums up how close we are to some kind of breakout point,” Chaar said. “The big question is going to be whether we’re going to get any positive signals from central banks as to when their hike cycle will peak … You don’t see many avenues through which the Fed could be reassuring.”
The consensus expectation on Wall Street is for the Fed to raise interest rates by 0.75 percentage point at the end of its two-day meeting on Wednesday. Market forecasts for a third consecutive rise of that magnitude were bolstered last week by data showing US consumer price inflation cooled less than forecast in August.
Federal funds futures-based prices suggest the Fed will raise its prime rate to 4.4 percent in the first few months of 2023, from the current range of 2.25 to 2.5 percent, as that the authorities try to cool inflation.
Fears are growing among investors that the central bank’s efforts to rein in inflation with monetary tightening will push the US economy into recession as debt servicing costs for businesses and individual borrowers rise.
The yield on US 10-year inflation-linked bonds, which indicate the returns investors can expect to receive after taking inflation into account, reached 1.159%, the highest since 2018. The so-called real yields were about minus 1% at the beginning. of the year, flattering valuations of fast-growing tech companies that weigh heavily in US stock indices.
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 aimed at calming the country’s currency market.
The Bank of Japan is set 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 longer-lasting inflation in an economy that has endured decades of tepid price growth.
The Bank of England will also announce its interest rate decision on Thursday, with the consensus forecast among City of London analysts pointing to a 0.5 percentage point rise.
Asian stocks also fell, with an MSCI gauge of shares in the region down about 0.5 percent. The UK and Japanese equity markets were closed for public holidays.
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