A stocks selloff worsened on Monday as concerns grew that the Federal Reserve will delay acting on a slowing US economy. Japanese shares plunged for a third day as traders priced in more domestic rate hikes.

Japan’s broader Topix index tumbled more than 6%, while the yen and the nation’s sovereign bonds rallied on bets the Bank of Japan will keep raising interest rates after last Wednesday’s hike. Korean and Australian shares slid, while US futures declined by more than 1%.

The price action underscores how quickly sentiment has shifted away from expectations that the Fed will be able to engineer a soft-landing for the US economy. Data on Friday showed that US nonfarm payrolls recorded one of the weakest prints since the pandemic, and the jobless rate unexpectedly climbed for a fourth month to 4.3%, above the Fed’s year-end forecast, triggering a closely watched recession indicator.

“With the unemployment rate above and core PCE inflation now below the Fed’s year-end forecasts, we believe that the balance of risks favors more aggressive action by the Fed,” said Brian Rose, a senior US economist at UBS Group AG’s wealth management unit. “We are changing our base case to rate cuts of 50 basis points in September and 25 basis points each in November and December” after previously just seeing half that amount by year-end, he wrote in a note to clients.
Oil rose on Monday after Saudi Arabia lifted the price of crude it sells to Asia and amid reports Iran may strike Israel to avenge assassinations of Hezbollah and Hamas officials. Saudi Arabian and Israeli stocks slumped more than 2% on Sunday, outpacing Friday’s losses on Wall Street.

A worsening conflict in the Middle East risks adding more tumult to markets as investors brace for a turbulent second half of the year. A gauge of bond market volatility has climbed, while the VIX Index – Wall Street’s fear gauge – jumped to the highest in almost 18 months.

The weak worries mount the Fed’s decision to hold rates at a two-decade high is risking a deeper economic slowdown. Traders are projecting the Fed will cut rates by more than a full percentage point in 2024, with an increased chance of an outsized 50-basis point cut in September, according to data compiled by Bloomberg.

In Asia, traders will soon focus on the private Caixin China services and composite activity data for a further gauge on the health of the world’s second largest economy after manufacturing PMI contracted unexpectedly for the first time in nine months. The data comes as Chinese officials made clear in July that there would be limited aid to spur domestic consumption.

Elsewhere this week, the Reserve Bank of Australia’s policy meeting will be parsed to confirm bets of easing by year-end, while US economic activity and credit data and speeches from regional Fed bank presidents will be closely watched.

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