U.S. stocks fell for a third day as risks from rising interest rates to economic growth and earnings kept a grip on sentiment.

Still, bulls can take some solace in the selloff in equities showing signs of easing, with the S&P 500 ending down 0.8 per cent, less than the 1.6 per cent slide a day earlier. Despite some selling into the close, dip buyers emerged in some big tech names while traders digested the latest Fedspeak.

Federal Reserve Governor Lael Brainard, considered a dove, said Thursday rates will need to stay elevated for a period to further cool inflation. She didn’t state a preference for whether the Fed should downshift hikes at its next meeting or what peak rate she envisioned this year. 

Her comments came a day after Fed hawks called for boosting rates, with St. Louis Fed President James Bullard penciling in a forecast for a rate range of 5.25 per cent to 5.5 per cent by the end of this year. The current range is 4.25 per cent to 4.5 per cent. 

Earnings provided little respite. Procter & Gamble Co. slid after reporting shrinking sales volume. Alcoa Corp. fell after saying aluminum shipments will be weaker than anticipated this year. Discover Financial Services sank after the credit-card company warned write-off rates may double this year.

Treasuries stayed lower throughout the session, with the 10-year yield rising 3 basis points, mirroring moves in German bunds after the head of the European Central Bank reaffirmed her aggressive stance. The dollar fell, while the euro and yen gained.

Adding to the somber mood, the U.S. hit its federal debt limit and the Treasury Department began the use of special measures to avoid defaulting on any payments.

Data were mixed Thursday, with new U.S. home construction declining for a fourth-straight month in December. Applications for U.S. unemployment benefits unexpectedly fell last week, sliding to the lowest level since September and underscoring a strong jobs market. That followed figures a day earlier showing producer prices and retail sales fell, while business equipment production slumped. 

“Wage growth has slowed, and broad data is weakening, but Fed officials (at least the ones that have spoken so far) are clearly reluctant to let financial conditions ease,” writes Dennis DeBusschere, of 22V Research. “The hyper focus on anchoring financial conditions will change as inflation continues to move lower/data weakens, but there are not enough data points for the Fed to be comfortable with that call yet.”

More commentary

• “The factors driving the sharp YTD rally (short covering, risk bid and lower yields) appear to be hitting their near term bounds,” writes Chris Harvey, head of equity strategy at Wells Fargo. This will likely cause the market to trade sideways-to-down over the short term.”
• “Jobless claims falling for the fourth week in a row is a sign that the labor market is still seemingly able to weather the storm, though the sizable layoffs at blue chips in these past weeks indicate the economic environment is weighing on companies–especially those in the tech sector,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “When considering that the overall earnings picture continues to be a mixed bag, investors shouldn’t be surprised to see more volatility in the weeks ahead.”
• “What just some weeks ago would have seen markets cheering the weaker data as it would have suggested correctly that the Fed’s aggressive rate hike campaign is doing its job in tamping down the demand side of the economy, is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike,” Quincy Krosby, chief global strategist for LPL Financial, writes. “The equity markets, always more cheerful than their fixed income brethren, have apparently begun to interpret data with a more realistic perspective.”

Key events this week:

• Japan CPI, Friday
• China loan prime rates, Friday
• U.S. 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 0.8 per cent as of 4:01 p.m. New York time
• The Nasdaq 100 fell 1 per cent
• The Dow Jones Industrial Average fell 0.8 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.4 per cent to US$1.0833
• The British pound rose 0.3 per cent to US$1.2389
• The Japanese yen rose 0.4 per cent to 128.42 per dollar

Cryptocurrencies

• Bitcoin rose 1.5 per cent to US$21,083.85
• Ether rose 2 per cent to US$1,558.82

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.39 per cent
• Germany’s 10-year yield advanced four basis points to 2.06 per cent
• Britain’s 10-year yield declined four basis points to 3.28 per cent

Commodities

• West Texas Intermediate crude rose 1.2 per cent to US$80.43 a barrel
• Gold futures rose 1.4 per cent to US$1,934.10 an ounce