With 2-year Treasury note yields testing 4%, stocks are on the back foot as the Fed kicks-off its two-date policy meeting in Washington.
U.S. equity futures edged lower again Tuesday, while Treasury bond yields jumped to multi-year highs, as investors looked to the start of the Federal Reserve’s two-day policy meeting in Washington.
The chances of a 75 basis point rate hike tomorrow, the third in succession, have been largely cemented by interest rate traders, according to the CME Group’s FedWatch.
The Fed’s next moves, however, and the level at which it will begin considering a ‘pause’ in rate hikes early next year, continues to elevate following last week’s faster-than-expected August inflation report and concerns that prices pressures have become imbedded into the world’s biggest economy.
“Investors are following the two-day US Federal Reserve meeting which begins today, where another 75-basis-point rate hike is expected, which will take the Fed Funds rate to 2.5%, as the central bank continues to chase the galloping inflation rate,” said Mihir Kapadia, CEO of London-based Sun Global Investments.
“The more aggressive monetary policy has stoked fears of an impending recession and has led to fall in most asset prices including bonds and stocks,” he added. “Corporate earnings this quarter will be a barometer for the health and resilience of the economy and sentiment.”
That concern is being expressed in the bond market, where 2-year note yield are trading at 3.973%, the highest since November of 2007, in anticipation of a Fed Funds rate that could reach as high as 4.5% early next year.
That move has put the extra yield, or spread, over benchmark 10-year notes at around 46 basis points, even with that paper trading at a 2011 high of 3.514%, raising the prospect of near-term recession as a result of the Fed’s inflation fight.
Elevated bond yields also act as a circuit-breaker for stocks, as the returns challenge the falling dividend yield levels for the S&P 500 and provide an investment alternative for risk-averse fund managers.
The prospect of hawkish rate signaling later this week, with interest rate decisions expected from the Bank of England and the Bank of Japan, was further stoked Tuesday by a surprise 100 basis point rate hike from the Swedish National Bank, which took its key lending 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 currency intervention from the BoJ, with the yen now trading at 24-year lows against the dollar and stoking import price pressures.
The moves have had little impact on the greenback so far, with the U.S. dollar index trading near 20-year highs against its global peers at 109.770, but are pushing stocks lower in both Europe and the United States heading into the Fed’s policy debate.
In Europe, the Stoxx 600 was marked 0.48% lower in early Frankfurt trading, following on from a 0.97% gain for the MSCI ex-Japan index in Asia.
On Wall Street, futures contracts tied to the S&P 500 are indicating a 17 point opening bell decline while linked to the Dow Jones Industrial Average are priced for a 105 point dip. Futures tied to the tech-focused Nasdaq are indicating a 65 point move to the downside.
In terms of individual stocks, Ford Motor (F) – Get Ford Motor Company Report shares slumped 5% after the carmaker cautioned that gummed-up supply chains would clip its third quarter bottom line.
UnitedHealth Group (UNH) – Get UnitedHealth Group Incorporated (DE) Report shares edged higher, while Change Healthcare (CHNG) – Get Change Healthcare Inc. Report surged 7%, after a federal judge denied a request from the Department of Justice to block its proposed takeover of the healthcare technology group.