(Bloomberg) — Stocks fell and bond yields rose on the eve of the Federal Reserve decision, with higher oil prices bolstering speculation interest rates will be higher for longer to prevent a flare-up in inflation.

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The S&P 500 extended its September decline, while the Nasdaq 100 fell about 1% amid losses in giants like Amazon.com Inc. and Nvidia Corp. Five-year US yields briefly hit the highest since 2007. Aside from bets the Fed will deliver a hawkish hold Wednesday, traders also cited hot Canadian inflation data — which sent the loonie up the most among major currencies. Brent oil topped $95 a barrel. Instacart is indicated to open at $39 on Tuesday — 30% above its initial public offering price.

Read: Traders Shift Focus to Hawkish Hedges Before Fed: Open Interest

Fed Chair Jerome Powell and his colleagues are widely expected to hold rates steady Wednesday. Still, supply shocks such as climbing oil prices present the central bank with a quandary as they simultaneously boost inflation and curb economic growth. Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s.

“The risks for headline inflation to heat up over the next couple of months are rising and that should complicate what the Fed does,” said Ed Moya, senior market analyst for the Americas at Oanda. “Do policymakers become convinced that despite a resilient labor market, pricing pressures will continue to ease? If core inflation shows it is struggling to continue to drop, the higher-for-longer rate regime will last a lot longer than the market is pricing in.”

In fact, after pricing in a “peak” in interest rates in November, trader bets have shifted out to December — suggesting that perhaps the market is giving more credence to signals of a more pronounced central bank pause, according to Christopher Jacobson at Susquehanna International Group.

Dot Plot

That’s why traders will closely examine any hints regarding the next Federal Open Market Committee meeting — with a close eye on the “dot plot” summary of economic projections, according to Fawad Razaqzada at City Index and FOREX.com.

“The Fed might signal the likelihood of an additional hike this year, thanks to a slower disinflation process bolstered by a robust US consumer and increased inflation expectations,” Razaqzada noted. “The FOMC may also revise the 2024 median plot to indicate fewer rate cuts than previously projected. Such a move could discourage bearish bets on the dollar.”

The market narrative has shifted from optimism that inflation has been dealt with to fears of an inflation reacceleration — driven by robust consumer data and recovering oil prices, according to Matthew Morgan, head of fixed income at Jupiter Asset Management.

“Consumer resilience has been surprising, and this period of volatility and uncertainty could be with us for some time,” Morgan noted. “The lessons of history, together with slowing inflation and some signs the consumer is running out of money, mean central banks should pause here — and wait and see the impact of what they have already done rather than risk serious damage to the economy.”

Weak Housing Data

Data Tuesday showed new US home construction dropped to the lowest level since June 2020 — highlighting the toll of declining housing affordability.

The sharp slide is concerning because housing has been one of the pillars of the economy that has held up much better than expected, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“If it turns out that this is the first crack in an otherwise bulletproof consumer, then it could change the narrative from an economy that is impervious to rapid interest rate hikes to one that is vulnerable and susceptible to a recession,” he added.

Corporate Highlights

  • Walt Disney Co. fell on plans to nearly double investment in its parks and resorts segment to $60 billion over the next 10 years.

  • Starbucks Corp. slipped after TD Cowen downgraded it to market perform, flagging “worrisome” pressures that could challenge same-store sales in China.

  • Deere & Co. retreated after Evercore ISI downgraded the farm-equipment company to inline from outperform.

  • Block Inc. dropped after the digital-payments firm said that Alyssa Henry, the CEO of its Square business, is leaving, with Jack Dorsey to take over.

  • Rocket Lab USA Inc., a small satellite-launch company, sank after a failed mission to space led to the loss of its primary Electron rocket and the payloads it was carrying to orbit.

  • Royal Caribbean Cruises Ltd. and Carnival Corp. climbed after being upgraded by Truist Securities, which cited strong trends and “cooled off” stocks.

  • Cboe Global Markets Inc. rose after the firm announced a chief executive officer change that analysts described as unexpected, while they were positive on the appointment to fill the role.

  • Microsoft Corp. plans to refresh its Xbox consoles in the holiday season of 2024, according to a product roadmap posted online as part of its case against the Federal Trade Commission.

Key events this week:

  • Japan trade, Wednesday

  • China loan prime rates, Wednesday

  • UK CPI, Wednesday

  • Federal Reserve policy meeting followed by Fed Chair Jerome Powell’s news conference, Wednesday

  • Bank of Canada issues summary of its September policy meeting, Wednesday

  • Eurozone consumer confidence, Thursday

  • Bank of England policy meeting, Thursday

  • US leading index, initial jobless claims, existing home sales, Thursday

  • China’s Bund Summit, Friday

  • Japan CPI, PMIs, Friday

  • Bank of Japan rate decision, Friday

  • Eurozone S&P Global Eurozone PMIs, Friday

  • US S&P Global Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.6% as of 10:42 a.m. New York time

  • The Nasdaq 100 fell 0.9%

  • The Dow Jones Industrial Average fell 0.6%

  • The Stoxx Europe 600 fell 0.2%

  • The MSCI World index fell 0.5%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.1%

  • The euro was little changed at $1.0689

  • The British pound rose 0.1% to $1.2398

  • The Japanese yen was little changed at 147.67 per dollar

Cryptocurrencies

  • Bitcoin rose 1.3% to $27,132.71

  • Ether rose 0.3% to $1,642.94

Bonds

  • The yield on 10-year Treasuries advanced three basis points to 4.33%

  • Germany’s 10-year yield advanced three basis points to 2.73%

  • Britain’s 10-year yield declined four basis points to 4.35%

Commodities

  • West Texas Intermediate crude rose 1.3% to $92.65 a barrel

  • Gold futures rose 0.1% to $1,955.80 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Isabelle Lee.

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