Stocks finished lower Thursday, while Treasury yields moved higher, as investors, while increasingly comfortable with Fed rate projections, began to worry about the health of the U.S. economy.
Investors closely tracked Wednesday's parade of Federal Reserve speakers, including New York Fed President John Williams, for any deviation from Chairman Jerome Powell's assessment that two more rate hikes are likely needed -- extending the current tightening cycle to ten -- in order to tame inflation and cool the red-hot labor market.
Williams told an event hosted by the Wall Street Journal that a two further hikes, which would take the Fed Funds target rate to a range of between 5% and 5.25%, "seems a very reasonable view of what we'll need to do this year in order to get the supply and demand imbalances down.'
Richmond Fed President Thomas Barkin, in fact, said Thursday that inflation has likely peaked, but noted that price pressures remain elevated and will take time to return to the central bank's preferred 2% target.
Weekly jobless claims data, as well, might add some reinforcement to that view, with new applications for jobless benefits rising by 13,000 over the period ending on February 4 to a bigger-than-expected total of 196,000.
The Fed's consistent messaging, alongside a stronger-than-expected auction of $35 billion in 10-year notes yesterday that drew historic interest from foreign investors, looks to have added to market optimism that inflation has peaked in the world's biggest economy.
The CME Group's FedWatch suggests both a 93.7% chance of another 25 basis point rate hike from the Fed next month in Washington, and a 71.9% chance of a follow-on move in May.
At the same time, the Atlanta Fed's GDPNow forecasting tool suggests current quarter growth is running at a 2.2% pace, suggesting solid momentum that could keep the economy from slipping into recession.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.14% lower at 103.26
Bond yields were marked higher in the New York trading session, however, with 10-year notes marked at 3.664% and 2-year notes pegged at 4.488fi%, putting the gap between the two benchmarks at around 83 basis points.
According to a study from the San Francisco Federal Reserve, a sustained inverted yield curve has preceded all of the nine recessions the U.S. economy has suffered since 1955, making it an extremely accurate barometer of financial markets sentiment.
"The Fed is resolute that they will take the Fed Fund rate over 5% yet the bond market is keeping the curve inversion high, a classic recession signal, with the 2-year - 10-year spread still at a very high 85 bps and the 2-year below the current overnight Fed Fund rate," said Louis Navellier of London-based Navellier Calculated Investing. "It also reflects the tension between believing inflation will fall while at the same time that companies will retain pricing power and grow margins."
On Wall Street, the Dow Jones Industrial Average finished down 249 points, or 0.73%, to 33,699, while the S&P 500 fell 0.88% and the tech-focused Nasdaq lost 1.02%.
Disney (DIS) shares lost 1.31% after returning CEO Bob Iger unveiled a raft of changes at the media and entertainment group as it fends off an activist challenge from billionaire investor Nelson Peltz.
Salesforce (CRM) rose 2.4% amid reports that a fifth activist investor, Dan Loeb's Third Point Hedge fund, has taken a stake in the world's biggest enterprise software group.
PepsiCo (PEP) jumped nearly 1% after modestly better-than-expected fourth-quarter earnings, and a boost in its annual dividend, even as sales suggested that consumers are starting to feel the impact of relentless price hikes.
Mattel (MAT) shares, meanwhile, tumbled 10.7% after the Barbie Doll maker posted weaker-than-expected holiday quarter earnings and cautioned that fading consumer demand would last for much of the current financial year even as the toy industry shows 'resilience' to "macroeconomic challenges".
In overseas markets, Europe's Stoxx 600 closed 0.62% higher in Frankfurt trading, taking the regional benchmark to a fresh one-year high, amid a busy earnings session and a softer-than-expected reading for German inflation over the month of January.
Overnight in Asia, the region-wide MSCI ex-Japan index was marked 0.57% higher into the close of trading, as China stocks bounced from a one-month low, while the Nikkei 225 slipped 0.08%.
