Wall Street set to extend losses on rate worries

© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., August 22, 2022. REUTERS/Brendan McDermid

By Devik Jain and Anisha Sircar

(Reuters) -U.S. stock indexes were set to open lower on Monday on worries over the Federal Reserve's plan to keep raising interest rates in its fight against inflation even at the cost of an economic slowdown.

Fed Chair Jerome Powell said on Friday that the U.S. economy would need tight monetary policy "for some time" before inflation is under control, knocking Wall Street's main indexes down more than 3%.

Powell's blunt and hawkish remarks quashed hopes that the U.S. central bank will resort to modest rate hikes after recent data suggested that price pressures were easing.

Money market traders are pricing in a 64.5% chance of a third straight 75-basis-point interest rate hike in September and expect the Fed funds rate to end the year around 3.7%.

The benchmark S&P 500 index has climbed 11.6% since mid-June but is still in a bear market after plummeting early this year. Some investors fear a tough September due to seasonal weakness and nervousness about the economic pain from interest rate hikes.

"We went from the Powell 'put' in June to the Powell 'put down' in August. So the market that had rallied on his guidance from June had to pull that rally back out," said David Waddell, chief investment strategist at Waddell & Associates.

"The market is a trader's paradise right now ... the economic backdrop has to prove a reason to be optimistic. Until then the traders are just going to vacillate between optimism and pessimism based upon what the Fed says."

Heavyweight technology and growth stocks such as Apple Inc (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA) Corp and Tesla (NASDAQ:TSLA) Inc were down between 1.3% and 2.1% in premarket trading, hit by rising U.S. Treasury yields. [US/]

The U.S. two-year Treasury yield, which is particularly sensitive to interest rate expectations, briefly scaled a 15-year high, while the closely watched yield curve measured by the gap between two and 10-year yields remained strongly inverted. [US/]

An inversion is seen by many as a reliable signal of an impending recession.

The CBOE's volatility index, Wall Street's fear gauge, hit a seven-week high of 27.39 points.

At 08:23 a.m. ET, Dow e-minis were down 256 points, or 0.79%, S&P 500 e-minis were down 35.75 points, or 0.88%, and Nasdaq 100 e-minis were down 136.5 points, or 1.08%.

Focus this week will be on the August non-farm payrolls data on Friday, as a cooldown in the job market could ease pressure on the Fed to raise rates aggressively.

Lyondell Basell Industries fell 2.5% after Keybanc downgraded the chemicals company's stock to "underweight" from "sector weight".

U.S.-listed shares of Pinduoduo (NASDAQ:PDD) Inc climbed 11.2% after the Shanghai-based company reported upbeat quarterly revenue, as a strict lockdown in several COVID-hit Chinese cities kept up demand for online shopping.