Stock Market Today: Stocks Slide, Bonds Yields Jump, As Fed Rate Decision Looms

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Updated at 4:15 pm EST

Stocks finished higher Monday, as investors braced for a key Federal Reserve rate decision that is likely to be echoed by major central banks in Europe and Asia.

While investors have long-anticipated another jumbo rate hike from the Fed this week, and particularly after a hotter-than-expected August inflation report, growing concern over the impact of central bank tightening on the broader global economy has added a new dimension to this week’s slate of rate decisions.

The Bank of England, which delayed last week’s policy meeting amid the nation’s mourning for Queen Elizabeth II, will meet Thursday, as will the Bank of Japan and the Swiss National Bank.

The World Bank urged policymakers last week to “shift their focus from reducing consumption to boosting production” amid concerns that faster rate hikes could tip the global economy into recession, while Goldman Sachs trimmed its 2023 U.S. growth forecast — to 1.1% from 1.5% — citing tighter Fed policy and a leap in headline unemployment.

In Germany, where Europe’s largest economy is already contracting, the Bundesbank warned Monday that “economic activity may pull back somewhat this quarter and shrink markedly in the autumn and winter months”, amid the region’s ongoing energy crisis. 

At present, the CME Group’s FedWatch suggests an 80% chance of a 75 basis point rate hike on Wednesday, the third in succession, with a near 50/50 chance of the Fed raising its target rate to between 4.5% and 4.75% by the end of February.

Bond markets continue to flash concerned recession warnings, with the difference between 2-year note yields — which are trading at the highest levels since 2007 — now some 46 basis points higher than the yield on 10-year notes.

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Benchmark 10-year notes, in fact, topped 3.5% for the first time since 2011, while the dollar index was marked 0.14% lower against a basket of its global currency peers in the overnight session to change hands at 109.62.

With investors now increasingly pricing-in the prospect of a U.S. recession, and more and more companies warning on the impact of fading demand and surging input costs, traders and investors will be keenly focused on any suggestion that Powell may alter the Fed’s inflation fight in order to avoid longer-term damage to the world’s biggest economy. 

Beyond the Fed, investors will also be focused on a key set of figures from the quickly-weakening housing market, with data on housing starts and building permits for the month of August at 8:30 am Eastern time on Tuesday, and existing home sales data following on Wednesday.

July quarter earnings from homebuilders Lennar  (LEN)  and KB Home  (KBH)  are expected Wednesday, as is an important earnings release from retail giant Costco Wholesale  (COST)  on Thursday. 

In Europe, the Stoxx 600 was marked 0.09% lower by the close of trading in Frankfurt to kick off the week, with markets in London closed to mark the Queen’s funeral. In Asia, the region-wide MSCI ex-Japan index fell 0.65% while Japan’s Nikkei 225 was closed for its Respect for the Aged Day holiday.

On Wall Street, the S&P 500 finished up 0.69%, while the Dow Jones Industrial Average climbed 197 points, or 0.64%, to 31,019. The tech-focused Nasdaq, which slumped more than 5% last week, gained 0.76%.

In terms of individual stocks, Take-Two Interactive  (TTWO)  shares finished up nearly 1% following a weekend report that portions of its new Grand Theft Auto VI game were leaked online.

Bitcoin prices were also in focus after slumping to a three-month low in overnight trading as global markets retreated from risky assets ahead of an active week for central bank rate decisions and another move higher for the U.S. dollar.