Stocks test 2-month lows as markets adapt to higher for longer Fed rates

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Stocks are hovering near the lowest levels in two months, with the dollar extending gains and Treasury yields nudging near new cycle highs, as markets adapt to the new ‘higher for longer’ Fed rate reality.

U.S. equity futures slipped lower Monday, following on from the worst week for Wall Street since March, as investors continue to retreat from risk markets amid a 'higher for longer' mantra on interest rates from western central banks and weakening growth prospects in major global economies.

At the same time, the report noted investors plowing another $2.6 billion in bonds, extending a run of 26 consecutive weekly gains. Global fund managers have also put a collective $1 trillion into cash this year, with both moves suggesting bets that central bank rate cuts remain a long way off with inflation rates more than double forecasts and set to rise further over the coming months.

Markets will get an early test for at least one of those themes later this week, in the form of the August reading of Fed's preferred inflation gauge on Thursday, as well as what could be an early look into autumn consumer spending patterns from Costco's COST quarter earnings update after the close of trading Tuesday.

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