Global stocks slip as rate hike fears push yields to 3-month highs

The morning after Labor Day, stock markets across the globe opened to a familiar anxiety: the prospect of more rate hikes ahead. U.S. Treasury yields climbed to their highest point in three months, a signal that investors were pricing in an extended period of monetary tightening. The dollar strengthened. The Japanese yen, meanwhile, slumped to a level not seen in nearly a quarter-century.

The culprit was a services industry report that arrived Tuesday morning with better-than-expected news—which, in the current climate, felt like bad news. The Institute for Supply Management's survey of the non-manufacturing sector showed activity picking up in August for the second consecutive month. New orders grew, employment expanded, and the pressures that had been squeezing supply chains and pushing prices higher began to ease. The index hit 56.9, beating what economists had forecast. On its face, it was a sign of economic resilience. But it also meant the Federal Reserve would have less reason to pause its campaign of raising interest rates.

Wall Street absorbed the report with visible discomfort. The Nasdaq fell hardest, dropping 0.74 percent. The S&P 500 lost 0.41 percent. The Dow Jones Industrial Average slipped 0.55 percent. It was the market's first full trading session after the holiday, and the tone was subdued. Across Europe, the picture was mixed—the STOXX 600 index edged up slightly, while a broader global gauge of equities shed 0.47 percent.

The real story, though, was in the bond market. The benchmark 10-year Treasury note yield climbed to 3.336 percent, the highest since mid-June. That represented a sharp move from just over a month earlier, when yields had bottomed at 2.516 percent. The climb reflected a hardening consensus about what central banks would do next. The European Central Bank was expected to announce a sharp rate increase later in the week. The Federal Reserve, meeting on September 21, was widely anticipated to raise its benchmark rate by 75 basis points—a move that would push the fed funds rate into a range of 3.0 to 3.25 percent, a dramatic shift from the near-zero levels that had prevailed as recently as March.

Tom di Galoma, a managing director at Seaport Global Holdings in New York, captured the mood succinctly: investors were caught between the fear of more rate increases to come, the stubborn persistence of inflation, and the prospect of quantitative tightening—the process by which central banks shrink their balance sheets by allowing maturing bonds to roll off without replacement. It was a tightening squeeze from multiple directions at once.

Currency markets reflected the same anxieties. The dollar index rose 0.6 percent as investors sought the relative safety of U.S. assets. The euro, which had been struggling for weeks, slipped again, falling 0.27 percent and failing once more to climb back above parity with the dollar. It was last trading at $0.9899. The yen, by contrast, was in freefall—weakening 1.53 percent to 142.80 per dollar, a level not seen in 24 years. Sterling, the other major currency that had been battered in recent weeks, found a small reprieve as Liz Truss took office as the new British prime minister, with expectations that she would announce a substantial energy relief package. The pound edged up 0.03 percent to $1.1516.

Commodity markets moved in the direction the rate-hike narrative suggested they would. Oil prices fell as traders grew more concerned about the dampening effect of higher borrowing costs on economic growth. Brent crude dropped 3 percent to settle at $92.83 a barrel. West Texas Intermediate crude ended the day at $86.88 a barrel, essentially flat from Friday's close. Gold, typically a hedge against inflation and currency weakness, fell 0.6 percent to $1,700.37 an ounce. The message from the markets was clear: in the near term, the fear of recession and tighter financial conditions was outweighing the traditional safe-haven appeal of precious metals.