October 7, 2022

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Stock markets continued to tumble on Monday as traders gear up for a Federal Reserve interest rate decision later this week.

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Dow Jones Industrial Average futures are down 265 points, or 0.9%, while S&P 500 futures are down 0.9% and Nasdaq Composite futures are down 1%.

Monday’s early fall continues the decline that started earlier this month. The S&P 500 is down nearly 6% on Monday, from September 12, when reports of higher-than-expected August inflation raised bets that the Fed will raise the federal-funds rate by at least three-quarters of a percentage point, and possibly in full. . Percent. Citi economists expect the Fed to raise rates by 75 basis points, saying a 100 basis point increase was not possible.

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“A surprisingly large 100bp hike would be a way to send a stronger, faster message, but we think most Fed officials would judge the potential costs outweigh the benefits,” the economists said. “Financials have tightened substantially following last week’s inflation data and there is no need for the Fed to push against the loosening of conditions that the Fed faced as equity prices hiked over the summer.”

Overall, though, stock traders have heard the Fed loud and clear — and are making some selloffs ahead of the Fed’s decision on Wednesday. It is now well understood that the Fed will aggressively raise rates, but the question now is when the pace of rate hikes will slow down. For now, the fear is that the recession is not coming soon, so markets will listen for forward-looking comments from Fed Chairman Jerome Powell.

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Of course, the fear is that America will be headed for a recession. Those fears were fueled last week when FedEx said it would not be able to meet analysts’ earnings estimates and warned of a global recession.

Selling continues in the bond market in view of the Fed’s plan for rates. The two-year Treasury yield has risen to 3.92%, which would mark a one-year high when it closed at that level. Yields increase with fall in prices. The 10-year Treasury yield has risen to 3.496%, in what would be a new closing high if it ends there.

Higher rates in the US, which make its bonds more attractive than other countries, are helping to boost the dollar. The US dollar index (DXY) is up nearly 0.2% to over 109, down from its multi-decade high earlier this month. A stronger dollar hurts major US stock indexes because multinationals that generate sales overseas see a lower dollar when they translate those sales into a stronger greenback.

Shares in Asia fell on Monday. Hong Kong’s Hang Seng fell more than 1%, led by Chinese shares Alibaba Baba—2.70% (Ticker: Baba) and JD.com JD-3.95% (JD). Shanghai Composite The session ended down 0.4%. European stocks also fell as the London Stock Exchange closed for Queen Elizabeth II’s funeral.

Write to Joe Woelfel at [email protected]