Equities end slightly lower as bond yields hold near multi-decade highs

US stocks closed marginally lower on Tuesday as government bond yields persisted near multi-decade highs, driven by anticipation of inflation and labor market figures. Longer-dated Treasury yields climbed, with the 30-year bond reaching 5.62 percent – its highest since June 2002. The benchmark 10-year Treasury bond increased to 5.29 percent, its highest level since June 2007.

Stocks rebounded somewhat as yields softened from their peaks, and shorter-duration yields declined amid lower oil prices, following hints of a Middle East exports recovery and comments from Federal Reserve Bank of New York President John Williams. Williams indicated the U.S. central bank has time to evaluate data before deciding on further rate hikes.

Anticipation for a 25 basis point increase from the Fed at its October meeting fell to 51.5 percent, from close to 70 percent earlier in the session. Oil prices surged in recent days, fueled by hopes that a U.S.-Iran peace deal might be imminent, but this optimism has waned, leading to rising crude and diesel fuel prices and inflation concerns.

Federal Reserve officials have signaled more rate hikes may be required if inflation pressures don't abate after the central bank's 25 basis point increase this month. Several crucial economic reports are slated for this week, including the Personal Consumption Expenditures Price Index from the Commerce Department on Wednesday, and the government payrolls report on Friday.

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, commented on the significance of PCE data tomorrow, noting potential stock sell-offs among consumers due to higher rates and gas prices. Higher yields increase the cost of capital, potentially making bonds more attractive than equities and impacting corporate earnings.

The Dow Jones Industrial Average slipped 131.59 points, or 0.26 percent, to 51,349.92, the S&P 500 fell 12.85 points, or 0.17 percent, to 7,670.84, and the Nasdaq Composite dropped 22.84 points, or 0.08 percent, to 26,797.54. Consumer confidence plunged to a nearly 12.5-year low in September, with households anticipating worsening business and labor market conditions due to the Iran war and rising interest rates.

While Federal Reserve Chair Jerome Powell advocated for patience on further rate hikes, other policymakers took a more aggressive stance, with Federal Reserve Governor Michael Barr suggesting additional hikes are necessary, and Federal Reserve Bank of Chicago President Austan Goolsbee warning that maintaining inflation above the Fed's target for five-and-a-half years is "playing with fire."

AI-related stocks garnered attention as Anthropic's initial public offering prospectus showed remarkable growth but also widened losses; the company is targeting a valuation exceeding US$2 trillion. Meta shares rose 3.3 percent, despite OpenAI's unveiling of autonomous "dots" agents, seen as a potential rival to Meta's newly released Muse.

Used-car retailer CarMax surged 4.7 percent after reporting higher second-quarter profit and revenue. Declining issues outpaced advancers on both the NYSE and Nasdaq, with the S&P 500 achieving eight new 52-week highs and 33 new lows, while the Nasdaq Composite recorded 34 new highs and 244 new lows. Trading volume on U.S. exchanges reached 16.15 billion shares, slightly below the 16.87 billion average for the session over the past 20 trading days.