U.S. stock futures fell and Treasury yields jumped to start the week, as investors remained rattled by the Federal Reserve’s resolve to keep fighting inflation even if it causes some economic pain.
Futures tied to the S&P 500 dropped 0.8%, putting the benchmark index on pace to extend its 3.4% loss on Friday. Contracts for the Dow Jones Industrial Average lost 0.8%, while those tied to the tech-focused Nasdaq-100 sank 1%.
Monday’s declines before the opening suggest U.S. stocks will likely see another turbulent day of trading, as traders assess Fed Chairman
Jerome Powell’s
comments from last week. Speaking Friday in Jackson Hole, Mr. Powell said the U.S. central bank must continue raising interest rates and keep them at an elevated level, until it is confident inflation is under control.
The comments unsettled investors, many of whom had begun to wager that this year’s historically large rate increases were in the rearview mirror. Many had expected that, starting in September, the Fed would slow the magnitude of its interest-rate increases, until eventually cutting rates next year.
Friday’s comments reshuffled those expectations. On Monday, federal-funds futures, used by traders to place wagers on the course of interest rates, showed a nearly 65% chance that the central bank would lift interest rates by 0.75 percentage point for a third time in a row in September. That is up from 28% a month ago, according to CME Group data.
“The market kind of got ahead of itself over the last three, four weeks or so…in terms of pricing in a possible Fed pivot to a more dovish stance,” said Clara Cheong, a global market strategist at J.P. Morgan Asset Management.
Investors’ growing jitters stand to further unwind a rally that had sent stocks climbing from their 2022 lows reached in June. Already, all three major U.S. indexes have seen their August gains wiped out. Many investors are betting on further pain ahead, with net short positions against S&P 500 futures recently reaching levels not seen in two years.
In premarket trading Monday, many of the S&P 500’s biggest losers were companies that had risen sharply amid the stock market’s summer rebound.
Tesla
fell 1.7%, while
PayPal Holdings
lost 1.6%. Economically sensitive stocks also took a beating before the opening bell, with
Las Vegas Sands,
Alaska Air Group
and Royal Caribbean all falling 1.8% or more.
“It’s game-changing. We’re coming from a world where people were looking for a Fed pivot, but they got a pivot in the wrong direction,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers, who noted he began lowering his exposure to stocks last week as volatility rose. “We are not defensive yet, but our exposure remains cautious.”
Investors’ risk-off sentiment rippled around the globe and across asset classes. The pan-continental Stoxx Europe 600 dropped 0.9%, following indexes in Asia lower. Bitcoin fell 3.5% from its 5 p.m. ET level on Friday to about $19,942 according to CoinDesk.
U.S. Treasury yields climbed further as a selloff in government bonds gathered pace. The yield on the two-year Treasury note, which is more sensitive to near-term Fed policy expectations, rose to 3.435%, from 3.391% Friday.
The 10-year Treasury yield rose to 3.091%, from 3.034%. High U.S. short-term yields relative to long-term yields—also known as an inverted yield curve—have in the past signaled a significant risk of a recession.
Oil prices rose, with Brent crude gaining 1.2% to $100.24 a barrel, buoyed by expectations of supply curbs.
In Asia, major indexes ended mostly lower. Japan’s Nikkei 225 fell 2.7%, South Korea’s Kospi dropped 2.2% and Hong Kong’s Hang Seng lost 0.7%. The Shanghai Composite was a rare bright spot, rising 0.1%.
Write to Caitlin McCabe at caitlin.mccabe@wsj.com and Dave Sebastian at dave.sebastian@wsj.com
All eyes on a television broadcast of Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium on Friday.
Photo:
Michael Nagle/Bloomberg News
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