Treasury yields climbed and stocks fell ahead of the Federal Reserve decision, with traders betting rates will be higher for longer to prevent an inflation flare-up. Brent oil briefly topped US$95 a barrel.

US five- and 10-year yields hit the highest levels since 2007. Most major groups in the S&P 500 dropped, but the gauge came well off session lows, led by gains in some megacaps like Apple Inc. and Tesla Inc. Online grocery delivery business Instacart surged in its Nasdaq debut. Walt Disney Co. slid on plans to nearly double its theme-park spending to US$60 billion over the next 10 years. The loonie rose the most among its developed-market peers after hotter-than-estimated inflation data in Canada.

Fed Chair Jerome Powell and his colleagues are widely expected to hold rates steady Wednesday. Still, supply shocks such as climbing oil prices present the central bank with a quandary as they simultaneously boost inflation and curb economic growth. Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s.

“The risks for headline inflation to heat up over the next couple of months are rising and that should complicate what the Fed does,” said Ed Moya, senior market analyst for the Americas at Oanda. “Do policymakers become convinced that despite a resilient labor market, pricing pressures will continue to ease? If core inflation shows it is struggling to continue to drop, the higher-for-longer rate regime will last a lot longer than the market is pricing in.”

In fact, after pricing in a “peak” in interest rates in November, trader bets have recently shifted out to December — suggesting that perhaps the market is giving credence to signals of a more pronounced central bank pause, according to Christopher Jacobson at Susquehanna International Group.

Investors are keenly focused on Fed officials’ updated quarterly rate projections — known as the dot plot — that will be released Wednesday at the conclusion of the policy meeting. High on the watchlist will be whether these forecasts continue to reveal a median view for one more quarter-point hike this year and whether forecasts for 2024 scale back the 100 basis points of rate reductions that officials foresaw in June.

To Fawad Razaqzada at City Index and FOREX.com, should the Fed revise the 2024 median plot to indicate fewer rate cuts than previously projected, that would discourage bearish bets on the dollar.

Since the Fed’s June forecasts, the disinflationary process has stabilized somewhat — but inflation risks are increasing, said Lauren Goodwin at New York Life Investments. As a result, officials will likely keep the incremental quarter-point hike in their projections, she noted — adding that a final increase would possibly be delivered in November.

“Our Fed checklist suggests the bar for rate cuts is still high,” Goodwin said. “Unless we see a meaningful economic slowdown, inflation is likely to fall in a slow and non-linear way. In other words, for the Fed to cut rates next summer — like the bond market has priced — we believe we’d need to see a recession.”

WEAK HOUSING DATA

Data Tuesday showed new US home construction dropped to the lowest level since June 2020 — highlighting the toll of declining housing affordability.

The sharp slide is concerning because housing has been one of the pillars of the economy that has held up much better than expected, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“If it turns out that this is the first crack in an otherwise bulletproof consumer, then it could change the narrative from an economy that is impervious to rapid interest rate hikes to one that is vulnerable and susceptible to a recession,” he added.

Corporate Highlights

• Starbucks Corp. slipped as TD Cowen downgraded it to market perform, flagging “worrisome” pressures that could challenge same-store sales in China.
• Deere & Co. retreated after Evercore ISI downgraded the farm-equipment company to inline from outperform.
• Block Inc. dropped as the digital-payments firm said that Alyssa Henry, the CEO of its Square business, is leaving, with Jack Dorsey to take over.
• Royal Caribbean Cruises Ltd. and Carnival Corp. climbed after being upgraded by Truist Securities, which cited strong trends and “cooled off” stocks.
• Cboe Global Markets Inc. rose after the firm announced a chief executive officer change that analysts described as unexpected, while they were positive on the appointment to fill the role.
• Amazon.com Inc. says it will hire 250,000 employees this holiday shopping season and boost average pay for logistics personnel to about US$20.50 an hour as it seeks to recruit and retain workers amid a labor shortage.
• CVC Capital Partners is gearing up for a potential listing as soon as November amid improved investor sentiment for new stock offerings, people with knowledge of the matter said.

Key events this week:

• Japan trade, Wednesday
• China loan prime rates, Wednesday
• UK CPI, Wednesday
• Federal Reserve policy meeting followed by Fed Chair Jerome Powell’s news conference, Wednesday
• Bank of Canada issues summary of its September policy meeting, Wednesday
• Eurozone consumer confidence, Thursday
• Bank of England policy meeting, Thursday
• US leading index, initial jobless claims, existing home sales, Thursday
• China’s Bund Summit, Friday
• Japan CPI, PMIs, Friday
• Bank of Japan rate decision, Friday
• Eurozone S&P Global Eurozone PMIs, Friday
• US S&P Global Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.2 per cent
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index fell 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.1 per cent to US$1.0681
• The British pound rose 0.1 per cent to US$1.2396
• The Japanese yen fell 0.1 per cent to 147.82 per dollar

Cryptocurrencies

• Bitcoin rose 1.5 per cent to US$27,176.23
• Ether rose 0.4 per cent to US$1,643.55

Bonds

• The yield on 10-year Treasuries advanced six basis points to 4.36 per cent
• Germany’s 10-year yield advanced three basis points to 2.74 per cent
• Britain’s 10-year yield declined five basis points to 4.34 per cent

Commodities

• West Texas Intermediate crude rose 0.2 per cent to US$91.62 a barrel
• Gold futures were little changed