Major averages close about 1% lower as yields rise ahead of Fed rate decision

The high rate of inflation means that the Federal Reserve can’t afford to be patient with its rate hikes, even if the full impact of its moves hasn’t hit the economy yet, according to Timothy Horan, CIO for fixed income at Chilton Trust.

“We’ve had six months of CPI above 8%. They would love to be able to rely on the fact that Fed rate hikes operate with a lag. They know that. It’s a given. But I don’t think that is going to cause them to delay or, worse yet, pivot right here,” Horan said.

Though headline inflation has remained stubbornly high, commodities such as oil and steel have declined. Producer prices have softened faster than consumer prices. That has led some to say that inflation has peaked, even if it may take a long time to decline back to the Fed’s 2% target level.

But Horan, a former Fed economist, said that the global nature of the inflation issue was one of many reasons that the Fed should continue its “muscular tightening” process.

“Those commentators who want to say that the Fed is already over tightening and we are risking too much do not realize the enormity of the problem,” he added.

Horan also said that he would be listening to hear Fed Chair Jerome Powell’s discussions around quantitative tightening in tomorrow’s press conference.

— Jesse Pound

Stocks remained in negative territory on Tuesday as the final hour of trading kicked off. The Dow Jones Industrial Average was last down 380 points, or 1.22%, while the S&P 500 and Nasdaq Composite slumped 1.2% and 0.9%, respectively.

All S&P 500 sectors continued trading in the red. Real estate was the biggest laggard, down about 2.5%.

— Samantha Subin

Oxford Economics’ Kathy Bostjancic anticipates further hawkishness ahead from the Federal Reserve and Chairman Jerome Powell.

Investors on Wednesday will be closely watching rhetoric from Powell when he speaks Wednesday following the central bank’s next rate hike decision.

“I think they have to continue to sound hawkish because they’re far from their inflation goal and demand and the labor market are still running too hot relative to supply,” she said.

Current market conditions and August’s hotter-than-expected CPI report, further underscore the central bank’s need to remain aggressive in its fight to tame surging prices, she added.

While Powell is unexpected to explicitly lay out the next rate decision, Bostjancic expects the chairman to leave the door open to another potential sizeable hike come November.

— Samantha Subin

Grantham Mayo van Otterloo, the Boston-based money manager co-founded by noted investor Jeremy Grantham in 1977, is out with its latest monthly forecast for stock and bond returns over the next seven years, and it again favors emerging market stocks over U.S. equities, and emerging market debt over other bond markets.

U.S. large cap stocks are forecast to lose 1.1% a year, down from an estimate of -2.2% a year previously. U.S. smallcaps are now projected to lose 1.0% a year, down from an estimated -1.9%.

Emerging market value stocks are forecast to return 8.7% annually, up from 8.5% last month, the best among the six classes of stocks measured. Emerging market stocks overall are estimated to return 4.8% a year, little changed, international smallcap stocks 4.2%, up from 3.2% and international large stocks 2.6% vs 1.6%.

The only positive return GMO projects in fixed income is emerging market debt, at 3.0% a year, up from 2.7% annually over the next seven years in the last projection. U.S. inflation-linked bonds are forecast to return -0.7% a year, down from – 1.8% last time; U.S. bonds -1.3% vs -2.4%; and international bonds (hedged for currency) at -2.6% against -3.4% per annum previously.

The returns are projected in after-inflation real terms, in local currency and assume a return on U.S. cash holdings of plus 0.2% a year. U.S. cash returns were pegged at -0.4% per year in the last forecast. GMO assumes U.S. inflation will “mean revert to long-term inflation of 2.2% [annually] over 15 years.” GMO pegs the long-term historical U.S. equity return at 6.5%.

GMO managed almost $72 billion as of the end of the first quarter 2022.

— Scott Schnipper

As the major averages slump, some individual stocks are making outsized moves both up and down.

One of the biggest gainers of the day is Change Healthcare, which has surged more than 6% Tuesday after a federal judge said that UnitedHealth cannot take over the company.

Shares of vaccine makers BioNTech, Moderna and Novavax rebounded, gaining Tuesday after falling Monday when President Joe Biden made a comment that the pandemic was over.

Shares of health company Humana gained 1% Tuesday and touched a 52-week high a day after the company raised its earnings guidance for the fiscal year. The company was also upgraded by Morgan Stanley, who said it could be the top retail drug plan for Medicare Advantage.

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—Carmen Reinicke

Rates climbed on Tuesday with the yield on the 10-year and 2-year Treasury notes notching multi-year highs as markets braced for another large rate hike from the Federal Reserve on Wednesday.

The yield on the 2-year Treasury hit a fresh 15-year high of 3.983%, while the yield on the 10-year note jumped to 3.593% — levels not seen since April 2011.

— Samantha Subin

Josh Brown of Ritholtz Wealth Management said on “Halftime Report” that stocks are poised for a short-term rally around the Federal Reserve meeting even though the bear market trends are still intact.

Brown pointed to calm volatility measures despite spiking Treasury yields, as well as the number of stocks in technical uptrends or at 52-week lows, as reasons to believe the market is approaching a near-term bounce.

“Today looks nothing like mid-June. … The fear, the volatility is just not there. Nothing like the last time we were at these levels, which leads me to believe, as hawkish as we think the Fed will be — and they should, that’s their job right now — I just don’t think the market has enough fear in it. And I just don’t think we’re going to have the same kind of reaction we got last time,” Brown said.

— Jesse Pound

Expect some “nasty down days” ahead stretching into late September and the start of October, Bank of America’s Stephen Suttmeier says.

“Average returns for each day of the month show plenty of negative (red) days for late September,” Suttmeier wrote in a note to clients Tuesday. “October has its share of big down days, but these down days often provide an opportunity for dip buyers ahead of better seasonality from November through January.”

While October experiences its fair share of down days, those moves lower create opportunities for dip buyers, Suttmeier said.

Bearish seasonal trends can also explain last week’s stock sell-off, with the historical bearish period commencing on Monday, he added.

“Going back to 1928, the S&P 500 is up only 40% of the time on an average return of -1.04% (-0.59% median) over this period,” he wrote.

— Samantha Subin

Apple shares turned around to trade more than 1% higher on the day, lifting the broader tech sector off its session lows. As of 11:31 a.m. ET, tech was only off by 0.3% after falling as much as 1.2% earlier in the day.

Rising fears of a looming recession are already contributing to the ongoing volatility in equity markets and investors should brace for more potential turmoil ahead, Goldman Sachs’ Dominic Wilson said.

“Heightened fear of recession risk has helped to keep US policy rate pricing inverted from early 2023 to early 2026 and may help to explain why equity volatility is higher than the macro landscape would generally predict,” wrote Wilson in a note to clients Tuesday. “Even so, markets will need to adjust significantly further if the more hawkish view of the labor market is right.”

Wilson said the S&P 500 needs to trade within the 2,900 to 3,375 range and 5-year yields between 4.5-5.4% if the Fed needs to see higher unemployment to gain confidence that inflation will fall.

These recessionary fears will continue to rise the longer inflation stays elevated, which in turn would force the central bank to more expeditiously fight inflation.

— Samantha Subin

Tuesday’s downbeat session saw just two S&P 500 stocks reach new highs: Humana and Constellation Energy. The former hit an all-time high dating back to 1968, when it was called Extendicare. Constellation Energy is back to record levels going back to its spin-off from Exelon earlier this year.

A slew of companies hit 52-week lows, however, including Match Group — which reached an all-time low. Here are some:

— Chris Hayes, Fred Imbert

The spike in yields could be good news for investors looking to park some cash right now and earn income, but it’s causing a headache for those who already owned bonds.

Strategas technical and ETF strategist Todd Sohn highlighted in a note to clients that broad bond funds have taken a big hit over the last six weeks, including the iShares Core U.S. Aggregate Bond ETF, which has now fallen more than 14% year to date.

“With 3Q concluding in a few weeks, there’s likely to be a fair amount of noise at the flows level with rebalancing in force. On that note, we’d argue two of the more important charts for investors and their…