A rally in stocks fizzled out after two Federal Reserve officials signaled that interest rates could top 5 per cent, throwing some cold water on traders who saw a peak below that mark.

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The S&P 500 failed to stay above the key 3,900 level, erasing an advance that reached almost 1.5 per cent earlier in the session. The Dow Jones Industrial Average underperformed, while the Nasdaq 100 remained higher thanks to gains in big tech, with Tesla Inc. surging about 6 per cent. The dollar pared losses.

Fed Bank of San Francisco President Mary Daly said she expects the central bank to raise rates to somewhere over 5 per cent. Her Atlanta counterpart Raphael Bostic noted that policymakers should hike above 5 per cent by early in the second quarter and then go on hold for “a long time.”

Investors also awaited Thursday’s U.S. CPI report that will come out almost a week after the latest jobs data showed that wage growth has decelerated. The figures will be among the last such readings policy makers will see before their Jan. 31-Feb. 1 gathering.

“In addition to the probability of interest rates remaining high and a possible economic slowdown, any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Chris Larkin at E*Trade from Morgan Stanley. “It could be a recipe for choppy near-term and long-term trading.”

Morgan Stanley’s Michael Wilson said that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are indeed still too high. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.

“With all eyes on this week’s CPI report, corporate earnings season, and next month’s Fed meeting, we expect volatility to return,” said Mark Hackett, chief of investment research at Nationwide. “Investors should avoid overreacting to large market moves as elevated volatility is our new normal.”

Still, the rising threat of an economic recession has done nothing to dissuade Corporate America from spending big on its own shares. American firms announced a record  US$1.26 trillion of buybacks in 2022, up 3 per cent from a year ago, according to data compiled by Birinyi Associates.

Key events this week:

• U.S. wholesale inventories, Tuesday
• Fed Chair Jerome Powell among speakers at Riksbank symposium in Stockholm, Tuesday
• World Bank expected to release global economic prospects report, Tuesday
• ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday
• U.S. CPI, initial jobless claims, Thursday
• St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday
• Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday
• China trade, Friday
• U.S. University of Michigan consumer sentiment, Friday
• Citigroup, JPMorgan Chase, Wells Fargo report earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 rose 0.6 per cent
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index rose 0.7 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.6 per cent
• The euro rose 0.8 per cent to  US$1.0734
• The British pound rose 0.7 per cent to  US$1.2182
• The Japanese yen rose 0.2 per cent to 131.82 per dollar

Cryptocurrencies

• Bitcoin rose 1.5 per cent to  US$17,206.51
• Ether rose 4 per cent to  US$1,319.87

Bonds

• The yield on 10-year Treasuries declined three basis points to 3.53 per cent
• Germany’s 10-year yield advanced two basis points to 2.23 per cent
• Britain’s 10-year yield advanced five basis points to 3.53 per cent

Commodities

• West Texas Intermediate crude rose 1.4 per cent to  US$74.82 a barrel
• Gold futures rose 0.3 per cent to  US$1,874.50 an ounce