Stocks declined, while Treasury yields climbed after a stronger-than-estimated reading on the U.S. services industry bolstered speculation the Federal Reserve will keep interest rates higher for longer.

The S&P 500 closed below 4,500 and the Nasdaq 100 fell almost 1 per cent — with Apple Inc. leading a slide in big tech amid higher bond rates. The company also dropped on a news report that Chinese agencies are barring the use of iPhones at work. Two-year yields topped 5 per cent. Swap contracts showed bets on a Fed hike in November rising to about 60 per cent. The dollar edged higher, following a rally that prompted Japan and China to defend their currencies.

Equities remained lower after the Fed’s Beige Book said growth in the U.S. economy and jobs market slowed in July and August, and many businesses expect wage increases to ease broadly in the near term. The Institute for Supply Management’s U.S. services index rose to a six-month high in August — hitting 54.5. Readings above 50 indicate expansion, and the figure topped all estimates in a Bloomberg survey of economists.

“The ISM Services Sector report underscores the resilience of the largest portion of the economy,” said Quincy Krosby, chief global strategist at LPL Financial. “Unfortunately, the prices-paid component moved in the wrong direction — similar to the higher prices paid in the manufacturing report — edging markedly higher. This is is certainly not good news for a data-dependent Fed.”

Fed Bank of Boston President Susan Collins said policymakers will need to be patient as they assess economic data to figure out their next steps and that further tightening may still be required. Meantime, former Fed Bank of St. Louis chief James Bullard noted officials should continue to pencil in one additional hike this year when they update their projections later this month.

‘BUMPY RIDE’

Following a string of stronger-than-expected reports on everything from consumer spending to residential investment, economists have been boosting their forecasts for gross domestic product. That marks a sharp turnaround from three months ago — the last time policymakers updated their own numbers — when the consensus view was that the economy would stall in the current quarter. 

And it may be enough to prompt Fed officials to scale back their estimates for rate cuts in 2024. Traders in recent months have trimmed bets on the degree of Fed easing they see next year — to about 100 basis points from well over 150 basis points early in 2023.

The two big challenges the Fed faces at this stage are the risks that inflation could become entrenched and the risks that the consumer could falter when excess savings dry up, according to Jeffrey Roach, chief economist at LPL Financial.

“Given the data, the Fed will most likely deliver a hawkish pause at the next meeting,” Roach added. “The hard data is not yet convincing enough to establish strong views about the subsequent meetings. Investors should still find opportunities in the market but it could be a bumpy ride.”

‘BEARISH IMPLICATIONS’

To Ben Jeffery at BMO Capital Markets, the ISM print is the only top-tier data of relevance this week. Once the dust settles, traders’ attention will return to the corporate-issuance calendar — with the “bearish implications” it holds for Treasuries.

Financial institutions, including several foreign banks, are leading at least 10 companies tapping the U.S. investment-grade primary market Wednesday — one day after both volume and deal count hit yearly highs.

Elsewhere, the loonie wavered as the Bank of Canada held rates steady and kept the door open to more hikes, with economists seeing a historic tightening cycle at its likely endpoint. European shares slipped as German factory orders plunged. The pound slid after Bank of England Governor Andrew Bailey suggested UK rates may not have to rise any further, saying a “marked” drop in inflation is likely this year and that monetary policy is probably “near the top of the cycle.”

Corporate Highlights

• Microsoft Corp. and Apple face fresh investigations from European Union regulators as part of the bloc’s landmark digital markets clampdown, which could end up forcing significant changes in how the firms do business in the region.
• AMC Entertainment Holdings Inc. sank as it plans to sell shares less than three weeks after getting court approvals that opened the door for the movie-theater operator to raise money to pay down its debt.
• The most advanced version of Lockheed Martin Corp.’s F-35 jet won’t be delivered until next April at the earliest and possibly as late as June because of persistent testing issues, the Pentagon said. The shares fell.
• Roku Inc., the maker of set-top boxes consumers use to watch Netflix Inc. and other streaming services, climbed after announcing plans to cut about 10 per cent of its workforce, consolidate office space and review its content portfolio.
• Warner Bros. Discovery Inc. plan to offer live sports at no additional cost on its Max streaming service for a limited period of time later this year, betting basketball, baseball and hockey will lure new customers, according to people familiar with the matter. The shares dropped.
• WeWork Inc. is renegotiating nearly all of its leases with landlords and plans to exit “unfit and underperforming” locations, Chief Executive Officer David Tolley said.
• Walt Disney Co. agreed to move up the date at which it must begin the process of buying Comcast Corp.’s one-third stake in the Hulu streaming service to Sept. 30 from January.
• Luxury-goods stocks slumped in Europe, wiping out more than US$25 billion in market value, after Richemont Chairman Johann Rupert said inflation is starting to dent demand across the region.

Key events this week:

• China trade, forex reserves, Thursday
• Eurozone GDP, Thursday
• U.S. initial jobless claims, Thursday
• Bank of Canada Governor Tiff Macklem to speak on the Economic Progress Report, Thursday
• Atlanta Fed President Raphael Bostic speaks, Thursday
• New York Fed President John Williams participates in moderated discussion at the Bloomberg Market Forum, Thursday
• Japan GDP, Friday
• Germany CPI, Friday
• U.S. wholesale inventories, consumer credit, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.7 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.9 per cent
• The Dow Jones Industrial Average fell 0.6 per cent
• The MSCI World index fell 0.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.1 per cent
• The euro was little changed at US$1.0727
• The British pound fell 0.5 per cent to US$1.2505
• The Japanese yen was little changed at 147.69 per dollar

Cryptocurrencies

• Bitcoin fell 0.1 per cent to US$25,673.16
• Ether was little changed at US$1,630.23

Bonds

• The yield on 10-year Treasuries advanced three basis points to 4.29 per cent
• Germany’s 10-year yield advanced four basis points to 2.65 per cent
• Britain’s 10-year yield was little changed at 4.53 per cent

Commodities

West Texas Intermediate crude rose 1.2 per cent to US$87.72 a barrel
Gold futures fell 0.5 per cent to US$1,941.90 an ounce