U.S. stocks ended the day just off session lows after weak economic data rekindled concern over the outlook for growth and corporate earnings. Treasuries rallied, while the dollar rebounded on deteriorating risk sentiment.

The S&P 500 fell 1.6 per cent, the worst decline in a month, while the tech-heavy Nasdaq 100 snap a seven-day rally, after reversing gains of more than 1 per cent. Earlier, stocks rallied as Treasury yields fell across the curve on bets weak data would prompt the U.S. Federal Reserve to downshift its tightening policy. Two Fed officials, however, repeated calls for more hikes even after further signs the economy was softening and inflation cooling. 

Growth in producer prices slid more than expected last month, and the drop in retail sales exceeded estimates, according to reports released Wednesday. Meanwhile, business equipment production slumped, with a decline in factory output wrapping up the weakest quarter for manufacturing since the onset of the pandemic. A consumer losing steam and business investment falling heightened concern the economy may be moving closer to recession.

In corporate news, Microsoft Corp. said it plans to cut 10,000 jobs, taking steps to cope with an increasingly bleak outlook. Bank of America Corp. started telling executives to pause hiring except for the most vital positions. Crypto firm Genesis Global Capital is said to be laying the groundwork for a bankruptcy filing.

“While risk assets have had a positive start to 2023, with investors encouraged by signs of fading inflation and a swift reopening in China, it remains possible that the rally is a ‘head fake,’ and that economic data will ultimately disappoint,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote. “The lagged effect of higher rates could represent a greater drag on growth than expected.”

Treasuries rose across the curve, with the 10-year yield dropping almost 18 basis points to 3.37 per cent in afternoon trading. Money markets boosted bets on policy easing, betting the Fed rate will peak just below 4.9 per cent, compared with the current band of 4.25 per cent to 4.5 per cent.

While markets price in a step down in the rate-hiking cycle, two closely followed Fed hawks repeated calls for more increases. St. Louis Fed President James Bullard said policy is “almost” in restrictive territory but not quite. 

Policy has to stay on the “tighter side in 2023,” Bullard said in an online Wall Street Journal interview, noting that he penciled in a forecast for a rate range of 5.25 per cent to 5.5 per cent by the end of this year in the Fed’s dot plot of projections.

Cleveland Fed President Loretta Mester said in an interview with The Associated Press published Wednesday that the Fed needs “keep going” but didn’t say how big a rate increase she favored when officials meet Jan. 31-Feb. 1. Philadelphia Fed chief Patrick Harker repeated his view of lifting interest rates in quarter-point increments “going forward.”

The survey in the latest Fed’s Beige Book indicated the pace of price increases had slowed in many districts and price growth was expected to moderate further in the year ahead.

“We expect 2023 to slowly see a shift of the market worrying about inflation to worrying about the economy, which is more of a ‘hard landing’ narrative,” said Jonathan Krinsky, chief market technician for BTIG. “Should we close lower today, and should tech/growth underperform despite the meaningful move lower in nominal and real rates, we could be in the early innings of the handoff from the Fed to the economy.”

The yen dropped as much as 2.6 per cent against the dollar after the Bank of Japan doubled down on defending their stimulus, defying intense market speculation. The currency later traded down 0.5 per cent.

Key events this week:

• US housing starts, initial jobless claims, Philadelphia Fed index, Thursday
• ECB account of its December policy meeting and President Christine Lagarde on a panel in Davos, Thursday
• Fed speakers include Susan Collins and John Williams, Thursday
• Japan CPI, Friday
• China loan prime rates, Friday
• US existing home sales, Friday
• IMF’s Kristalina Georgieva and ECB’s Lagarde speak in Davos, Friday

Here are some of the main market moves:

Stocks

• The S&P 500 fell 1.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.3 per cent
• The Dow Jones Industrial Average fell 1.8 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro was little changed at $1.0790
• The British pound rose 0.4 per cent to $1.2338
• The Japanese yen fell 0.6 per cent to 128.88 per dollar

Cryptocurrencies

• Bitcoin fell 2.8 per cent to $20,722.46
• Ether fell 3.8 per cent to $1,520.25

Bonds

• The yield on 10-year Treasuries declined 18 basis points to 3.37 per cent
• Germany’s 10-year yield declined seven basis points to 2.02 per cent
• Britain’s 10-year yield declined one basis point to 3.31 per cent

Commodities

• West Texas Intermediate crude fell 1.2 per cent to $79.22 a barrel
• Gold futures fell 0.2 per cent to $1,905.50 an ounce