NEW YORK – Global equities slid and the 10-year Treasury yield traded close to a 16-year high on Monday amid rising concerns that the Federal Reserve’s higher-for-longer message on interest rates will take a toll on U.S. consumers.
Rising oil prices, a possible government shutdown in less than two weeks and the United Auto Workers strike against the Detroit Three automakers could all slow a U.S. economy that is still running strong with the pace of inflation too high.
“There is concern about the economy and that’s related directly to the increase in interest rates, the Fed funds rate. It’s making it more difficult for people to buy houses, buy cars and borrow money in general,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.
While the market has discounted a rate hike when the Fed concludes a two-day policy meeting on Wednesday, the possibility remains of another hike in the future.
“The Fed is unlikely to raise at this meeting,” Ghriskey said. But I think they’re in an every-other meeting raise cycle, unless we really see significant improvement in inflation.”
Global crude benchmark Brent came close to $95 a barrel in a further surge in oil prices. The market shrugged the surge off last week due to the resilience of the U.S. economy and key inflation data for August showing a decelerating trend.
But rising oil prices will crunch the consumer, especially with the resumption of student loan payments in October, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“Higher oil prices are a tax on consumption,” Chandler said. “Most of the economic downturns since the ’70s have taken place after an oil shock, mostly a doubling of the price of oil.”
The benchmark 10-year Treasury yield was at 4.3125 percent, just below the 4.366 percent level reached on Aug. 22, and the two-year yield rose further above 5 percent.
While futures show just a 1 percent chance that the U.S. central bank hikes interest rates on Wednesday, the market expects the Fed to keep its overnight lending rates above the 5 percent mark until late July 2024.
“With inflation still well above the Fed’s 2 percent target, another rate increase is certainly more likely to occur before any rate cuts, despite the fondest wishes of the markets,” said Saira Malik, chief investment officer at Nuveen in a note.
MSCI’s gauge of stocks across the globe closed down 0.24 percent. The pan-European STOXX 600 index lost 1.05 percent, hit by lowered growth outlooks as Societe Generale’s shares slumped 12.05 percent after a keenly awaited strategic plan from its new chief executive disappointed investors.
France’s third-biggest listed bank said it expected little if any growth in annual sales over the coming years in a keenly awaited strategic plan from its new chief executive.
In London, the export-heavy FTSE 100 posted its worst day in over a month, falling 0.8 percent on a 6.1 percent drop in automobiles and parts.
Wall Street’s main indices seesawed for most of the session to eke out nominal gains at the close. The Dow Jones Industrial Average rose 0.02 percent, the S&P 500 added 0.07 percent and the Nasdaq Composite edged up 0.01 percent.
China property woes, geopolitical tensions and ongoing strikes also stoked worries about global growth.
Shares of property developer China Evergrande Group plunged 25 percent on Monday after police detained some staff at its wealth management unit. Fellow developer Country Garden faced another liquidity test with a deadline to pay $15 million in interest linked to an offshore bond.
The disappearance of China’s defense minister heightened uncertainty about President Xi Jinping’s stance on international engagement.
Central banks
Global central banks take center stage, with five of those overseeing the 10 most-heavily traded currencies holding rate-setting meetings this week. A swathe of emerging market central banks including Turkey and South Africa will also meet.
On Thursday, the Bank of England is tipped to hike for the 15th time and take benchmark borrowing costs to 5.5 percent.
The Bank of Japan is the key risk event on Friday. Markets are looking for any signs that it could be moving away from its ultra-loose policy faster than previously thought, after recent comments by Governor Kazuo Ueda sent yields much higher.
The Swedish crown sank to a record low against the euro on Monday, days before the Riksbank is expected to raise interest rates again.
In other currencies, the dollar slid 0.166 percent to 105.07 after recently trading within sight of six-month highs. The dollar lost strength as the day progressed.
The euro gained about 0.30 percent to $1.069, after slumping to a 3-1/2 month low of $1.0632 last week as the European Central Bank signaled its rate hikes could be over.
Against the yen, the dollar was slid 0.17 percent at 147.58.
U.S. crude rose 71 cents to settle at $91.48 a barrel, while Brent settled up 50 cents at $94.43, after earlier hitting $94.95.
Gold prices gained, helped by a slight pullback in the dollar as investors awaited key central bank policy decisions this week.
U.S. gold futures settled 0.4 percent higher at $1,953.40 an ounce.