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Stocks fell with US equity futures, giving up early gains, as traders braced for another supersized US rate hike amid rising anxiety the Federal Reserve could overtighten and raise the odds of a hard landing.

The Stoxx 600 Index dropped 0.8 per cent, paced by losses on real estate and miners. US equity futures also declined after briefly trading higher, with those on the tech-heavy and rate-sensitive Nasdaq 100 underperforming S&P 500 peers.

The US central bank kicks off its meeting today and is expected to again hike rates by 75 basis points Wednesday, signal rates are heading above 4 per cent and will then pause. The long hold strategy is rooted in the idea the central bank would avoid the disastrous stop-go policy of the 1970s that allowed inflation to get out of hand. Market participants have dialed back expectations of an even larger increase and only two of 96 economists in a Bloomberg survey now predict a full-point move.

Wall Street remains focused on inflation and the Federal Reserve’s attempt to lower prices by aggressively raising interest rates. On Wednesday, the central bank will announce its latest decision on rates. It is expected to raise its benchmark rate, which influences interest rates throughout the economy, another three-quarters of a percentage point.

“The Federal Reserve is likely tightening policy straight into the teeth of a recession,” Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, wrote in an email. “The stock market’s addiction to Fed easing when stocks decline may be what Jerome Powell is aiming to quash by aggressively hiking rates, in addition to inflation.”

Treasury 10-year yields topped 3.5% while yields on the more policy-sensitive two-year rate hit the highest since 2007 and are poised to crack above 4%, reflecting hard-landing fears.

Meanwhile, in a worrying trend for stocks, real rates — Treasury yields adjusted for inflation — rose to the highest level since 2011. When they were pinned in negative territory during a decade of easy-money policies, real rates had been a key driver of risk-asset rallies.

The broader market is coming off of its worst week in three months following a surprisingly hot report on inflation and big companies, including FedEx, warning about worsening trends in the economy.

Wall Street has been worried that the Fed’s plan to cool the hottest inflation in four decades could be too aggressive and throw the economy into a recession by pumping the brakes on growth too hard. The higher rates also tend to weigh on stocks, especially the pricier technology sector.

Investors will get another update on the housing sector on Wednesday when the National Association of Realtors releases August figures for sales of previously occupied homes.

Average long-term U.S. mortgage rates climbed above 6% last week for the first time since the housing crash of 2008. The higher rates could make an already tight housing market even more expensive for American homebuyers.

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by Styliana Charalambous Head of Market Research
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