Stocks ended lower 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.
Stocks were also pushed lower by another grim set of figures from the housing market, where permits for new construction in the month of August fell 10%, even amid a modest bounce in housing starts, suggesting surging mortgage rates will continue to limit builder and buyer interest.
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 3.962%, 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 110.13, 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 1.09% lower by the close of trading in Frankfurt, following on from a 0.97% gain for the MSCI ex-Japan index in Asia.
On Wall Street, the S&P 500 ended down 1.12%, while the Dow Jones Industrial Average fell 312 points, or 1.01%, to 30,707. The tech-focused Nasdaq lost 0.95%.
In terms of individual stocks, Ford Motor (F) shares slumped 10% after the carmaker cautioned that gummed-up supply chains would clip its third quarter bottom line.
UnitedHealth Group (UNH) shares finished slightly lower, while Change Healthcare (CHNG) surged 6.4%, after a federal judge denied a request from the Department of Justice to block its proposed takeover of the healthcare technology group.
Boeing Co. (BA) shares finished up nearly 1% after aviation regulators in China confirmed a meeting with company executives aimed at bringing the troubled 737 MAX back into service in the world's biggest airplane market.
Nike (NKE) shares slumped 4.4% after analysts at Barclays lowered their rating and price target on the world's biggest sports apparel group ahead of its first quarter earnings later this month.
Apple (AAPL) shares ended up 1.6% after the company unveiled plans to boost App Store prices in Europe and Asia.
