Wall Street traders sent bonds and stocks down, with strong economic data reinforcing the view that the Federal Reserve isn’t ready to call victory over inflation just yet.

Treasuries came under renewed pressure on speculation that optimism regarding disinflation may have gone too far. In another sign that the world’s largest economy remains on solid footing, the Institute for Supply Management’s services gauge hit a four-month high while prices picked up. The news jolted trading on a day when investors were already digesting cautious views from some Fed speakers including Jerome Powell.

The “one-two punch” prevented market players from achieving further upside, according to Jose Torres at Interactive Brokers. JPMorgan Chase & Co. strategist Marko Kolanovic said that “absent a material shock, we think this year’s easing will prove more moderate than markets have priced.”

U.S. 10-year yields climbed 14 basis points to 4.16 per cent and those on two-year notes approached 4.5 per cent. Fed swaps almost wiped out the odds of a March rate move, and the chances of a May cut have also been reduced. The dollar hit its strongest since November. The S&P 500 fell from a record high — but came well off session lows as Nvidia Corp. led gains in chipmakers.

Powell reiterated that policymakers will likely wait beyond March to cut rates in an interview conducted Thursday with CBS’s 60 Minutes that aired Sunday evening. Fed Bank of Minneapolis President Neel Kashkari said officials have time to gauge incoming data before easing while his Chicago counterpart Austan Goolsbee reiterated he’d like to see more of the favorable inflation data.

To Thierry Wizman at Macquarie, the shift in the market’s assessment of when the Fed will begin to cut rates seems valid.

“We had always thought that June was the likelier month for a cut in view of the Fed’s prudence,” Wizman noted. “What does worry us, though, is whether the ongoing strength of the U.S. job market in January means that the U.S. consumer will stay strong, thereby undoing the disinflationary trend, and extending tight monetary policy more indefinitely.”

The ISM’s overall gauge of services increased to 53.4 last month. The index has remained above the 50 level that indicates expansion for a year. The latest reading exceeded all estimates in a Bloomberg survey of economists. The group’s metric of prices paid for materials jumped — showing that costs are rising at a faster pace.

Jeffrey Roach at LPL Financial says the big uptick in prices paid mostly reflected the increase in shipping costs. Investors should expect prices to revert if conditions in the Red Sea improve, he added.

“The ongoing strength of the U.S. economy relative to most of its G-10 peers is one of the key reasons why we have held a counter consensus bullish view on the USD since September 2023,” said Dominic Bunning at HSBC. “The strength of activity data will, in our view, make it hard for the Fed to have confidence that inflation is fully tamed. As such, we see rate pricing in the U.S. being more prone to upside than downside for now.”

Bill Gross said he’s betting that part of the interest-rate curve will return to a more normal pattern, eliminating the inversion that’s persisted even after the Fed stopped raising interest rates. The one-time king of the bond world said on social media X that he’s buying September 2024 contracts tied to the Secured Overnight Financing Rate and selling the September 2025 one.

Meantime, the Fed said U.S. banks reported stricter credit standards in the fourth quarter, although the proportion of those tightening standards shrank from the prior period, according to the Senior Loan Officer Opinion Survey on Bank Lending Practices — known as SLOOS.

The report signals the severe credit crunch feared in the wake of the collapse of four regional lenders last year hasn’t materialized. While high borrowing costs have more broadly weighed on households as the Fed has lifted interest rates to a two-decade high, the economy has remained resilient.

“In light of the trend seen in this series during the last few quarters, we’re comfortable with the Fed’s assessment that the regional banking crisis has been contained and there wasn’t any contagion into the broader banking system,” said Ian Lyngen at BMO Capital Markets. “This puts last week’s NYCB headline into perspective and reinforces investors’ take that, perhaps, it was simply an idiosyncratic event lacking any systemic ramifications.”

With the S&P 500 coming off its best stretch in nearly four decades, the road gets tougher for investors as the calendar flipped to February. It’s the third-worst month for the gauge in the past 30 years, behind September and August, according to data compiled by Bloomberg.

After a torrid rally of almost 20 per cent since October that took the S&P 500 to its first records in two years, there’s ample reason for concern: Artificial-intelligence hype came in for a reality check with the latest batch of big-tech earnings; fevered speculation that the Fed would start easing next month has gone cold; and valuations remain elevated relative to history, evoking memories of the dot-com bubble for some strategists.

“It’s worth asking ourselves, have we priced in a little too much good news, at least in the near term?” said Mark Hackett at Nationwide. “Over the last two years, and especially during election years, this point on the calendar – February through March – tends to take a dip. Coupled with elevated sentiment and positioning, I expect to see a sideways to slightly negative move over the next 6-8 weeks as we get through seasonal choppiness.”

“After that, my longer-term outlook for the year remains positive,” he added.

Corporate Highlights:

• Palantir Technologies Inc. said that demand for its artificial intelligence products was driving sales at the company, and gave a higher-than-expected profit outlook for 2024.
• Reddit Inc. posted a more than 20 per cent rise in revenue in 2023 versus the year before, people familiar with the situation said, as it prepares for one of the U.S.’s most anticipated potential initial public offerings.
• ·Microsoft Corp. video-game chief Phil Spencer said he’ll reveal more information about his plans next week, after gamers expressed anger online about reports the company will bring some Xbox-exclusive titles to the rival Sony PlayStation and Nintendo Switch consoles.
• Boeing Co. found more mistakes with holes drilled in the fuselage of its 737 Max jet, a setback that could further slow deliveries on a critical program already restricted by regulators over quality lapses.
• Caterpillar Inc. batted away concerns of a global economic slowdown after reporting higher fourth-quarter sales in its energy and transportation business, which helped it to post profit that topped analysts’ expectations.
• The U.S. Attorney’s Office in Manhattan has launched an investigation into the accounting practices at Archer-Daniels-Midland Co., according to people with direct knowledge of the matter.
• McDonald’s Corp.’s sales missed investor expectations in the fourth quarter as growth decelerated, hurt in part by the conflict in the Middle East.
• Snap Inc. is reducing its workforce by roughly 10 per cent worldwide, joining the chorus of technology companies that have announced fresh rounds of cuts in 2024.
• Estée Lauder Cos. said it’s cutting as many as 3,000 positions as part of a restructuring plan to put one of the world’s largest beauty companies back on track.

Key events this week:

• Reserve Bank of Australia’s rate decision, Tuesday
• Eurozone retail sales, Tuesday
• Germany factory orders, Tuesday
• UBS earnings, Tuesday
• Bank of Canada Governor Tiff Macklem speaks, Tuesday
• Fed’s Loretta Mester and Patrick Harker speak, Tuesday
• Germany industrial production, Wednesday
• Walt Disney earnings, Wednesday
• Fed’s Adriana Kugler and Tom Barkin speak, Wednesday
• China PPI, CPI, Thursday
• U.S. wholesale inventories, initial jobless claims, Thursday
• Treasury Secretary Janet Yellen speaks at a Senate banking committee hearing on the Financial Stability Oversight Council annual report, Thursday
• Pharma CEOs speak at a Senate panel on prescription drug prices, Thursday
• ECB Chief Economist Philip Lane speaks, Thursday
• ECB publishes economic bulletin, Thursday
• U.S. CPI revisions, Friday
• Germany CPI, Friday
• President Joe Biden hosts German Chancellor Olaf Scholz at the White House, Friday
• Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.2 per cent
• The Dow Jones Industrial Average fell 0.7 per cent
• The MSCI World index fell 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.4 per cent to US$1.0742
• The British pound fell 0.8 per cent to $1.2536
• The Japanese yen fell 0.2 per cent to 148.66 per dollar

Cryptocurrencies

• Bitcoin fell 0.9 per cent to $42,361.51
• Ether fell 0.4 per cent to $2,289.39

Bonds

• The yield on 10-year Treasuries advanced 14 basis points to 4.16 per cent
• Germany’s 10-year yield advanced seven basis points to 2.32 per cent
• Britain’s 10-year yield advanced nine basis points to 4.01 per cent

Commodities

• West Texas Intermediate crude rose 0.7 per cent to $72.82 a barrel
• Spot gold fell 0.7 per cent to $2,024.86 an ounce