U.S. stocks sank Tuesday as confidence in the economy waned and investors contemplated a protracted period of high interest rates. The dollar extended its winning streak for a fifth day. 

An equity selloff deepened in the afternoon session with the S&P 500 Index falling 1.5 per cent and the Nasdaq 100 sliding 1.5 per cent. The equities benchmarks fell to the lowest since early June after a report showed consumer confidence in the world’s biggest economy stalled this month, dropping to 103 from a revised 108.7 in August, and missing the median estimate of 105.5 in a Bloomberg survey of economists. Wall Street’s fear gauge — the Cboe Volatility Index or VIX — ratcheted higher closing at the highest since May.  

“The market is in the hands of the bears right now,” said Quincy Krosby, chief global strategist for LPL Financial. “It’s a wall of worry, uncertainty hovering over the market. You wouldn’t say that the selloffs have been tremendously dramatic — in fact, they’ve been kind of orderly. But there’s still that uncertainty.”

Separate reports also showed purchases of new homes fell to a five-month low while home prices in the U.S. rose to a record high over the summer as buyers battled over a tight supply of listings. Investors will be looking for other signs that consumers may be feeling pinched when the warehouse club, Costco Wholesale Corp., reports after the bell. 

“Consumer attitudes in recent months appear even more sensitive than normal to inflation generally and gasoline prices specifically,” Stephen Stanley, chief U.S. economist at Santander, wrote. “While the Fed is focused mainly on core, the average consumer is spending a substantial portion of their budget on food and energy and are unwilling to ignore those prices.”

Yields on Treasuries drifted back up after reaching decade highs on Monday. A US$48 billion Treasury auction of two-year notes was awarded at 5.085 per cent, the highest since 2006. The Bloomberg dollar index advanced, setting a fresh 2023 peak in its strongest close since early December. Oil resumed its climb, moving back above US$90 a barrel. 

Tech giants, namely Apple Inc., Microsoft Corp., Amazon.com Inc. and Google-parent Alphabet Inc. dragged on the U.S. stock gauges. The threat of tight policy is undoing some of the market’s biggest gains this year in high-flying tech stocks. These growth companies are prized for their long-term prospects but hold less appeal when future profits get discounted at higher rates. That’s reflected in growing short positions against the technology-heavy Nasdaq 100 Index.

Positioning in the Nasdaq 100 is now one-sided net short at US$8.1 billion, with all long positions unwound, according to Citigroup Inc. strategists.  

One Fed speaker after another in the past week has delivered emphatic messages that they will keep policy tighter for longer if the economy is stronger than expected. Federal Reserve Bank of Minneapolis President Neel Kashkari said he expects the U.S. central bank will need to raise interest rates one more time this year.

“Investors are beginning to realize that a ‘higher for longer’ interest rate environment is a likely outcome and are slowly adjusting to the ‘new normal,’” Paul Nolte, a senior wealth manager at Murphy & Sylvest Wealth Management, wrote in a note. “Higher-for-longer has been the mantra of the Fed for a few months. It is only recently that the markets have been taking them at their word.”

Jamie Dimon, chairman and chief executive of JPMorgan Chase & Co., floated the idea U.S. interest rates could reach 7 per cent, a worst-case scenario that could catch consumers and businesses off-guard. Meanwhile, a warning that a U.S. government shutdown would reflect poorly on America’s credit rating from Moody’s Investors Service kept traders focused on an end-of-month deadline. 

Key events this week:

• ECB’s Philip Lane speaks on monetary policy, Tuesday
• China industrial profits, Wednesday
• U.S. durable goods, Wednesday
• Eurozone economic confidence, consumer confidence, Thursday
• U.S. initial jobless claims, GDP, Thursday
• Fed Chair Jerome Powell town hall meeting with educators while Richmond Fed President Tom Barkin, Chicago Fed President Austan Goolsbee make speeches, Thursday
• Eurozone CPI, Friday
• Japan unemployment, industrial production, retail sales, Tokyo CPI, Friday
• U.S. consumer spending, wholesale inventories, University of Michigan consumer sentiment, Friday
• ECB President Christine Lagarde speaks, Friday
• New York Fed President John Williams speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.5 per cent as of 4:01 p.m. New York time
• The Nasdaq 100 fell 1.5 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.3 per cent
• The euro fell 0.2 per cent to US$1.0571
• The British pound fell 0.5 per cent to US$1.2156
• The Japanese yen fell 0.1 per cent to 149.05 per dollar

Cryptocurrencies

• Bitcoin fell 0.2 per cent to US$26,243.75
• Ether rose 0.1 per cent to US$1,589.06

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.55 per cent
• Germany’s 10-year yield advanced one basis point to 2.81 per cent
• Britain’s 10-year yield was little changed at 4.33 per cent

Commodities

• West Texas Intermediate crude rose 1 per cent to US$90.58 a barrel
• Gold futures fell 0.9 per cent to US$1,918.50 an ounce