The S&P 500 slipped Monday as Treasury yields briefly touched 5% and oil prices jumped, with traders pricing a 90% chance the Federal Reserve raises rates this week. Unusually, a hike could still lift stocks if it restores confidence in the Fed's inflation fight.
The S&P 500 fell 0.4% on Monday as rising Treasury yields and a jump in oil prices pressured shares ahead of this week's Federal Reserve decision. The Nasdaq Composite slipped 0.3%, and the Dow Jones Industrial Average traded down 98 points, or 0.2%, though all three indexes closed well off their session lows.
Treasury yield touches 5% before paring back
The 10-year Treasury yield rose to its highest level since October 2023 on Monday, hitting 5% during the session. Yields pulled back later in the day, however, and the 10-year note ended down more than 3 basis points at 4.944%.
Oil jumps after Saudi pipeline closure
Crude prices also rose after Saudi Arabia shuttered a key pipeline that bypasses the Strait of Hormuz, though they came off their earlier highs. West Texas Intermediate futures gained 1% to above $101 a barrel, while Brent crude added 1% to above $105.
Traders price 90% odds of a hike
Fed funds futures traders are pricing in a roughly 90% likelihood of a rate hike this week, with the federal funds rate seen rising to a range of 3.75% to 4.00% following Wednesday's decision, according to the CME FedWatch tool. That would mark an unusual rate hike backdrop for stocks to rally into.
A hike that could lift stocks instead of sinking them
Rate increases typically pressure stocks by raising borrowing costs and lowering the value of future earnings. But the prospect of worsening inflation, alongside the upward pressure adding to longer-dated Treasury yields, has shifted traders' priorities toward the bond market first. According to Scott Ladner, chief investment officer at Horizon: "That's the unusual setup today."
Following the initial rate hikes of six tightening cycles over the last 30-plus years, the S&P 500 has dropped an average 3.4% in the following month, according to Canaccord Genuity analyst Michael Graham. Still, JPMorgan's Mislav Matejka said much of the recent rise in bond yields likely reflects the rebuilding of a compressed term premium rather than a signal that inflation is about to spiral, which could leave room for further gains in equities through year-end.
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