Stocks dip as 10-year Treasury yield climbs back toward key 4% level

U.S. stocks fell Tuesday and bond yields spiked as investors worry that higher interest rates are ahead amid stubborn inflation and may weigh on corporate earnings and push the economy into recession.

The Dow Jones Industrial Average fell 108 points, or 0.37%. The S&P 500 and the Nasdaq Composite fell to new lows, falling 1.08% and 1.65% respectively, weighed down by falling big tech names such as Meta Platforms, which are sensitive to rising rates. Semiconductors also declined, continuing a rout that began Monday.

Bond prices also fell. The yield on the U.S. 10-year Treasury rose about five basis points to 3.937% after nearing the key 4% level overnight. Bond yields are inverse to prices, and a basis point is one hundredth of one percent.

The moves came as investors look ahead to key inflation data that will inform how aggressively the Federal Reserve will hike interest rates to tame inflation. On Wednesday, the producer price report will be released and followed by the September consumer price index Thursday. On Friday, September retail sales will give futher insight into consumption.

The path of the central bank’s interest rate increases may push the U.S. eocnomy into recession, which would drag down company earnings.

JPMorgan CEO Jamie Dimon on Monday warned that the U.S. would likely fall into a recession over the next “six to nine months,” and said the S&P 500 could fall another 20% depending on whether the Federal Reserve engineers a soft or a hard landing for the economy.

“This is an awful stock market environment that is grappling with a weakening economy, uncertainty over earnings and how long the Fed’s tightening will last, and sentiment issues with an extremely risk averse investor psychology,” said David Bahnsen, chief investment officer of The Bahnsen Group, in a Tuesday note.

“We believe the Fed will raise interest rates one or two more times until the Fed funds rate reaches 4% and then take a pause, at which point the Fed will assess the damage done,” he added.

This week also kicks off earnings season. On Friday, JPMorgan, Wells Fargo, Morgan Stanley and Citi – four of the world’s largest banks – report quarterly earnings.