U.S. stocks edged higher while bonds yields surged this week as worries about the banking sector abated and traders upped wagers that at least one more interest rate increase could be in store from the Federal Reserve this year.

The S&P 500 rose 0.8 per cent this week even as policy-sensitive technology names like Microsoft Inc. and Apple Inc. dragged on the benchmark. The Nasdaq 100 managed to squeeze out a 0.1 per cent gain after the tech-heavy gauge erased some of its Friday losses late in the session after swaps traders upped bets for a rate increase by June, trading suggests a quarter point hike has better than three-in-four odds for May.

Markets were rattled after Fed Governor Christopher Waller said he favored more policy tightening in the central bank’s battle with inflation. His comments further fueled hawkish bets after a Reuters report indicated Atlanta Fed President Raphael Bostic was calling for a quarter-point increase at the May meeting followed by a pause.

Treasury yields rose, with the rate-sensitive two-year jumping 13 basis points to trade around 4.1 per cent, a weekly high, after a measure of March retail sales showed core readings declined less than estimated and comments from Fed officials suggested more tightening ahead. A Bloomberg gauge of the dollar climbed while gold futures tumbled. 

Equities have been stuck in a narrow trading range this week and options data suggest they could remain there as the relative price to hedge remains elevated. Chartists are eying 4,200 as the key level the S&P 500 needs to breakthrough to finally regain some momentum. 

“There’s a lot for both bulls and bears to hang their hats on right now,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “Bulls can point to pervasive bearish sentiment, last year’s rerating, declining interest rates, the falling U.S. dollar, lower gas prices, the China reopening, a resilient domestic economy and decent market momentum.”

“On the other hand, bears can points to weakening overall growth, the earnings recession, tightening liquidity, as well as the the stubbornly high concentration and valuations in growth stocks,” he added.

A Deutsche Bank team led by Henry Allen pointed to similar concerns. “The problem for many investors right now is that it’s still possible to construct fairly divergent narratives about the economy depending on which series you look at,” they wrote. “For instance, yield curves have inverted, temporary jobs are declining, and on previous occasions when the Fed have hiked this fast and this quickly, a recession has followed shortly afterwards.”

Yet, the bank’s strategists added, “you could point to unemployment around its lowest in decades, a high level of vacancies by historic standards, financial markets that have mostly shrugged off the SVB-related turmoil by now, along with growing signs that inflation is softening and the Fed are nearing a pause in their rate hikes.”

Financials outperformed Friday with JPMorgan Chase & Co. and Citigroup Inc. leading the charge after earnings. Assurances about the sector’s health and an increase in deposits following the March failures of three smaller U.S. lenders drove the big banks higher. Regional peers slid.

The sector will remain in the hot seat Monday when Charles Schwab Corp. and State Street Corp. report. Investors will be looking for signs of health from Schwab, which has plunged roughly 40 per cent this year as rising rates drove a spike in unrealized losses at the brokerage. Bank of America Corp. and Goldman Sachs Group Inc. will report later in the week as will Netflix Inc. and Tesla Inc.

While data earlier this week suggested runaway prices were moderating somewhat, a Friday report suggested Americans are pessimistic. Inflation expectations jumped in April with consumers seeing prices climbing 4.6 per cent on an annual basis, up from 3.6 per cent in March, according to a University of Michigan survey.

“Inflation in our minds clearly peaked last summer and has continued to improve. But the caveat is that we’re still a ways away from the Fed target,” Philip Orlando, chief equity market strategist and head of client portfolio management at Federated Hermes said of the central bank’s 2 per cent inflation goal. “The Fed, once they do that last hike, in all likelihood is going to go on pause. And we think a pause is going to last a while, likely into next year.”

A hold on rates could draw investor focus back to the debate over an economic downturn and whether the market has a hard or soft landing in store.

“We started the year off with pretty solid data. Now we’re getting a payback into March,” Ethan Harris, head of global economic research at BofA Securities told Bloomberg Television after the retail sales report. “And so the question is: is this the beginning of that slide into recession? I’m leaning in that direction. I think that there’s some fundamental weakening going on in the economy.” 

In commodities, crude logged its fourth week of gains amid signs of a tightening global market while gold slumped. Bitcoin edged higher, holding above the key US$30,000 level which it broke through earlier in the week.

Some of the main moves in the market:

Stocks

• The S&P 500 fell 0.2 per cent as of 4:01 p.m. New York time
• The Nasdaq 100 fell 0.2 per cent
• The Dow Jones Industrial Average fell 0.4 per cent
• The MSCI World index fell 0.1 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.5 per cent to US$1.0996
• The British pound fell 0.9 per cent to US$1.2415
• The Japanese yen fell 0.9 per cent to 133.78 per dollar

Cryptocurrencies

• Bitcoin rose 0.1 per cent to US$30,315.74
• Ether rose 4 per cent to US$2,088.42

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 3.51 per cent
• Germany’s 10-year yield advanced seven basis points to 2.44 per cent
• Britain’s 10-year yield advanced nine basis points to 3.67 per cent

Commodities

• West Texas Intermediate crude rose 0.6 per cent to US$82.64 a barrel
• Gold futures fell 1.8 per cent to US$2,019.30 an ounce