Stocks down, bond prices rise with rates, economy in focus

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By Sinéad Carew

NEW YORK (Reuters) - Wall Street's major indexes tumbled on Friday and U.S. Treasury prices climbed as investors' fears about the prospects for a global recession intensified while they also prepared for a massive U.S. interest rate hike from the Federal Reserve.

Economic fears were amped up by a FedEx Corp (NYSE:FDX) revelation late on Thursday that a global demand slowdown had accelerated at the end of August and was on pace to worsen in the November quarter, prompting the delivery company to withdraw its financial forecasts.

The warning came at a time when investors were already jittery ahead of a Fed meeting after which the central bank is widely expected to raise rates by 75 basis points. Some traders are bettting on a 100 basis points increase, according to CME Group's (NASDAQ:CME) FedWatch tool. The Bank of Japan and Bank of England are also due to meet next week.

The stock market is down on a "growing concern that's really starting to escalate that the Fed is going to make a mistake and overtighten," said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.

Paulsen said the FedEx warning had led investors to ask, "what if the Fed's going to tighten right into a recession."

After increasing to 3.924%, its highest level since 2007, earlier in the day, the two-year U.S. Treasury yield, a bellwether for interest rate expectations, pared gains and was last down slightly.

Coupled with a decline in the benchmark 10-year note, the yield curve inversion between the two notes - seen as a recession harbinger - widened further.

The two-year's yield fell 1.6 basis points to 3.857% and the 10-year yield slid 1.3 basis points to 3.446%.

The gap between the two, which has inverted because the short end is higher than the long end, widened to -41.2 basis points.

In equities, declines were broad-based across major industries as the FedEx news fueled fears about the economy.

"The Fed will view the FedEx report as an indication that they are on the right path, rather than a warning that the Fed may be moving too aggressively," said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey. [.N]

The Dow Jones Industrial Average fell 332.65 points, or 1.07%, to 30,629.17; the S&P 500 lost 56.4 points, or 1.45%, to 3,844.95; and the Nasdaq Composite dropped 204.01 points, or 1.77%, to 11,348.34.

The pan-European STOXX 600 index lost 1.58% and MSCI's gauge of stocks across the globe shed 1.47%.

Earlier in the day, the European Central Bank's vice president said an economic slowdown in the euro zone would not be enough to control inflation and the bank will have to keep raising rates.

The dollar index rose 0.036%, with the euro down 0.04% to $0.9995.

The Japanese yen strengthened 0.39% versus the greenback at 142.95 per dollar, while Sterling was last trading at $1.1388, down 0.65% on the day.

Analysts and fund managers said the yen could hurtle toward three-decade lows before year-end.

Oil prices rose on Friday as a spill at Iraq's Basra terminal appeared likely to constrain crude supply, but the commodity remained on track for a weekly decline on fears that hefty interest rate increases will curb global economic growth and demand for fuel.[O/R]

U.S. crude recently rose 0.31% to $85.36 per barrel and Brent was at $91.59, up 0.83% on the day.

While gold prices turned positive on the day, they had earlier hit their lowest level since April 2020 and were still down for the week.

Spot gold added 0.6% to $1,673.16 an ounce. U.S. gold futures gained 0.34% to $1,671.70 an ounce.