Stocks slide, dollar steady as market gauges Fed's rate policy

By Herbert Lash and Alun John

NEW YORK/LONDON, Dec 6 (Reuters) - Global stocks headed for a third straight day of losses on Tuesday and the dollar held steady as the market assesses how long the Federal Reserve keeps interest rates higher and the likelihood that policy provokes a recession.

U.S. stocks followed European shares lower, with all sectors in the red, with the exception of the defensive utilities sector .SPLRCU , which seesawed between gains and losses.

MSCI's U.S.-centric all-country world index .MIWD00000PUS fell 1.06%, on track for a third session in a row of declines after hitting a three-month high last week.

Treasury yields fell, but more at the long end of maturities than the short end, which deepened the inverted yield curve, a market indicator of a looming recession. The gap between yields on two- and 10-year notes US2US10=RR was -82.6 basis points.

The market needs to recognize that a recession most likely is a reality, not just a hypothetical, and that valuations need to go lower, said Jason Pride, chief investment officer of private wealth at Glenmede in Philadelphia.

"During recessions, markets on average price at a discount to fair value, which they have not yet done," Pride said. "There is not a single instance in which a market has bottomed before the recession started."

Data released on Monday showing U.S. services industry activity unexpectedly picked up in November and last week's robust U.S. payrolls report have raised doubts about how soon the Fed would ease monetary policy from being restrictive.

Futures show the market expects the Fed's peak terminal rate to rise to 4.9951% next May, but by December 2023 to have declined to 4.565% on speculation the Fed will cut rates to help the economy rebound from an expected slowdown in growth. FEDWATCH

Wall Street was dragged lower by banking shares and Meta Platforms Inc META.O , after European Union regulators ruled its Facebook and Instagram units should not require users to agree to personalized ads based on their digital activity.

The Dow Jones Industrial Average .DJI fell 0.79%, the S&P 500 .SPX slid 1.19% and the Nasdaq Composite .IXIC dropped 1.57%. In Europe, the STOXX 600 index .STOXX lost 0.56%.

The dollar was mostly unchanged against the euro and yen after strong gains on Monday, with investors awaiting next week's expected 50 basis points rate hike by the Fed.

The euro EUR= rose 0.24% to $1.0516, while the yen JPY= strengthened 0.22% at 136.44 per dollar.

Euro zone government bond yields fell after two European Central Bank officials signaled inflation and rates may be close to peaking in the run-up to a raft of major central bank decisions.

The ECB, the Bank of England and the Fed all meet next week to discuss monetary policy. The Reserve Bank of Australia offered a glimpse of decisions to come after raising interest rates to decade highs and sticking with a prediction of more hikes ahead.

All eyes will be on the release next Tuesday of November's U.S. consumer price index data, which will provide insight into the pace of inflation.

The yield on U.S. 10-year notes US10YT=RR fell 4.2 basis points to 3.557%.

Oil prices fell in a volatile market as the dollar stayed strong and economic uncertainty offset the bullish impact of a price cap placed on Russian oil and the prospects of a demand boost in China.

On Monday, crude futures recorded their biggest daily drop in two weeks.

U.S. crude CLc1 fell 2.24% to $75.21 a barrel and Brent LCOc1 was at $80.70, down 2.39% on the day.

Spot gold XAU= added 0.3% to $1,774.09 an ounce.

World FX rates YTD Link
Global asset performance Link
Asian stock markets Link
The race to raise rates Link

Reporting by Herbert Lash, additional reporting by Anshuman
Daga in Singapore and Alun John in London; Editing by Simon
Cameron-Moore, Angus MacSwan and Jonathan Oatis

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