U.S. stocks dropped for a second session as investors revisited their wagers on peak rates after economic data highlighted persistent inflationary pressures and Federal Reserve officials continued to sound hawkish.

The S&P 500 closed the day at its lowest level in nearly six weeks. The Nasdaq 100 dropped to its lowest since January 30. Both indexes remained lower for most of the session after a gauge of manufacturing improved for the first time in six months and investors balked at prices-paid measures also rising.

Treasury yields stayed higher, with the 10-year rate piercing the closely watched 4 per cent level. Fed swaps are now pricing in a peak policy rate of 5.5 per cent in September, with some traders betting that the benchmark interest rate could reach 6 per cent. A dollar index the most since February 1.

Investors remained cautious on Wednesday after Fed officials reinforced their hawkish stance on Wednesday. Atlanta Fed’s Raphael Bostic called for continued rate hikes to above 5 per cent to make sure inflation doesn’t pick up again. Minneapolis Fed President Neel Kashkari, meanwhile, said he’s concerned that there isn’t much of an indication that the central bank’s rate hikes are slowing down the services sector. 

“The markets crossed the fine line between expectations and wishful thinking,” said Deborah Cunningham, senior portfolio manager at Federated Hermes. “But investors checked that fantasy within the shortest month of the year. Indeed, change can come quickly after acceptance.” 

Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, says the VIX, a measure of volatility in stocks, hasn’t been the most reliable indicator of what’s happening in the markets recently. 

“To say that the volatility markets have been strange for the last couple of months is maybe the understatement of the millennium here,” he said on Bloomberg Television. “And a lot of reason the truth is so difficult to discern is because of these zero-days to expiration options, which really are ruling the moves from moment to moment in the markets.”

He says the macro picture will become clearer in the coming weeks, depending on the incoming economic data.

While data showing China’s economy is on track for a stronger recovery had briefly buoyed U.S. stock futures before markets opened, that bounce didn’t sustain during Wednesday’s trading session.

“This is a China story. This is not a global growth story,” Mike Wilson, chief U.S. equity strategist at Morgan Stanley, told Bloomberg Television. “So yes, it’s very good for China equities and maybe some Asian economies that can, that can gear off of that. But not so much the U.S. stock market, which isn’t that geared to China growth.”

Bonds in Europe also fell as evidence mounted that further tightening is needed to tamp down on inflation. The latest data showed an unexpected acceleration in German inflation in February, further complicating the European Central Bank’s task after overshoots this week in other parts of the continent. A 4 per cent ECB terminal rate is also now fully priced with rates forecast to rise through February 2024. 

Key events this week:

• Eurozone CPI, unemployment, Thursday
• U.S. initial jobless claims, Thursday
• Eurozone S&P Global Eurozone Services PMI, PPI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5 per cent as of 4:03 p.m. New York time
• The Nasdaq 100 fell 0.9 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World index fell 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.5 per cent
• The euro rose 0.9 per cent to US$1.0666
• The British pound was little changed at US$1.2019
• The Japanese yen was little changed at 136.20 per dollar

Cryptocurrencies

• Bitcoin rose 1.1 per cent to US$23,399.5
• Ether rose 2.1 per cent to US$1,640.26

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 3.99 per cent
• Germany’s 10-year yield advanced six basis points to 2.71 per cent
• Britain’s 10-year yield advanced one basis point to 3.84 per cent

Commodities

• West Texas Intermediate crude rose 0.9 per cent to US$77.74 a barrel
• Gold futures rose 0.4 per cent to US$1,844.80 an ounce