Stocks dropped during the last stretch of Tuesday’s session and bonds pared earlier losses as investors rounded out a brutal month for both assets with low-conviction moves.

The S&P 500 suffered a February drop of 2.6 per cent. The Nasdaq 100 also didn’t manage to avert a monthly decline. A dollar index rose the most in February since September. The yield on two-year Treasuries climbed more than 10 basis points for the month. The benchmark 10-year rate, meanwhile, rose more than 40 basis points in February. 

Bonds in Europe also fell on Tuesday after hot inflation data caused a reassessment of rate expectations, picking up a theme that has dominated trading in a month that saw the Federal Reserve signal its intention to ratchet rates higher than the market had been anticipating.

Investors in February grappled with realization that inflation isn’t cooling to the extent the Fed would like to see, especially as key indicators the central bank is watching came in hotter than expected. That subdued some of the optimism that had sent stocks soaring in January.

Bond traders no longer view the odds of a Fed rate cut this year as better-than-even, a shift from what they were expecting just a month ago. Traders are now pricing U.S. rates to peak at 5.4 per cent this year, compared with about 5 per cent just a month ago. Market expectations also see the European Central Bank raising rates through February 2024, with a 4 per cent ECB terminal rate fully priced.

“This whipsaw between narratives this year – Fed pause hopes being constructive for high beta assets, recession realities being the opposite – will continue,” Lauren Goodwin, economist and portfolio strategist at New York Life Investments, wrote in a note. “For this reason, and because the hurdle rate for keeping up with inflation is so high, we believe it’s important for investors to stay invested, leveraging resilient themes.”

Traders are also, once again, sifting through a bevy of economic data on Tuesday. U.S. consumer confidence declined in February because of concerns about the outlook for jobs, incomes and business conditions. U.S. home prices, meanwhile, fell for a sixth consecutive month.

“A lot of what the Fed is doing is working,” said Eric Diton, president and managing director of the Wealth Alliance, who noted layoffs at large companies and bankruptcies in small retail firms. “But it’s not a smooth ride. You’ll get blips — January was stronger data across the board and we’ll have to see what February and March look like. But I still think the overall trend is working — inflation is coming down, but it’s going to come down at this slower pace.”

Key events this week:

• China manufacturing PMI, non-manufacturing PMI, Caixin manufacturing PMI, Wednesday
• Eurozone S&P Global Eurozone Manufacturing PMI, Wednesday
• U.S. construction spending, ISM Manufacturing, light vehicle sales, Wednesday
• 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 0.3 per cent as of 4:03 p.m. New York time
• The Nasdaq 100 fell 0.1 per cent
• The Dow Jones Industrial Average fell 0.7 per cent
• The MSCI World index rose 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.1 per cent
• The euro fell 0.3 per cent to US$1.0576
• The British pound fell 0.3 per cent to US$1.2027
• The Japanese yen was little changed at 136.20 per dollar

Cryptocurrencies

• Bitcoin fell 0.6 per cent to US$23,254.31
• Ether fell 0.1 per cent to US$1,625.68

Bonds

• The yield on 10-year Treasuries was little changed at 3.92 per cent
• Germany’s 10-year yield advanced seven basis points to 2.65 per cent
• Britain’s 10-year yield advanced two basis points to 3.83 per cent

Commodities

• West Texas Intermediate crude rose 1.6 per cent to US$76.92 a barrel
• Gold futures rose 0.5 per cent to US$1,834.80 an ounce