(Bloomberg) -- Wall Street saw a renewed flight-to-safety bid, with stocks dropping and bonds rallying after softer economic data revived fears that a recession could be in store.
In a rotation away from growth shares, the Nasdaq 100 underperformed major benchmarks. Some of the most-speculative pockets of the market bore the brunt of the selling, with a basket of profitless technology firms tracked by Goldman Sachs Group Inc. tumbling 4.5%. Banks trimmed losses after Western Alliance Bancorp disclosed its total deposits at the end of the quarter.
Traders flocked to shorter-maturity Treasuries, driving two-year yields down 18 basis points at one stage. The 10-year note's rate was 1.5 percentage point lower than the three-month Treasury bill yield — the widest margin in decades and historically a reliable signal that the economy is headed for a slowdown. The dollar rose alongside the Japanese yen. Gold traded near a 13-month high.
"Recession risks have increased," said Mark Haefele, chief investment officer at UBS Global Wealth Management. "The equity outlook is challenging. As the slowdown of the US economy becomes more apparent, we think investors should prepare for a peak in interest rates by considering opportunities in bonds."
Swap Market
The slump in Treasury yields just intensifies the market's standoff with the Federal Reserve, which last month raised its benchmark to 4.75%-5%. In addition to favoring a pause in tightening rather than another quarter-point hike in May, swap contracts linked to Fed meeting dates now anticipate the policy rate falling to 4% in December.
Policymakers speaking since the March meeting have said they are watching economic data to determine how much recent banking stress may tighten access to credit or slow the economy. Fed Bank of Cleveland President Loretta Mester told Bloomberg Television that officials will need to raise interest rates "a little bit higher" and then hold them there for some time to bring inflation back toward their goal.
That doesn't mean the Fed will continue to raise rates until inflation hits the target, Mester added.
For several market observers, one thing that might tilt the central bank toward the end of its hiking cycle is the fact that a year's worth of interest-rate hikes might already be filtering through economic activity.
Still, even if the Fed pauses its rate hikes, "restrictive policy will continue to hit the economy with a lag," according to Don Rissmiller at Strategas.
'Whisper Fears'
The US service sector expanded in March at a much slower pace than projected on considerably weaker new orders growth and softer business activity. Separate figures Wednesday from ADP Research Institute showed private payrolls increased by a less-than-expected 145,000 in March.
"ADP private employment tally was much weaker than expected, and with other high-frequency labor market metrics, suggests deteriorating labor-market growth," said Stan Shipley, economist at Evercore ISI. "Whisper fears suggest a tepid jobs report on Friday."
The upcoming US payrolls report is forecast to show employers added about a quarter of a million jobs last month and the unemployment rate held at a historically low level.
To Bill Adams, chief economist at Comerica Bank, while the recent jobs figures support a pause in Fed policy tightening, an upside surprise from next week's inflation reports could still tip the balance toward another quarter-point rate increase.
"The labor market is getting less tight. This is one of the Fed's conditions for pausing its interest rate hiking campaign, but the Fed also wants to see core inflation slow more," Adams noted.
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Key events this week:
- US initial jobless claims, Thursday
- St. Louis Fed President James Bullard speaks, Thursday
- US unemployment, nonfarm payrolls, Friday
- Good Friday. US stock markets closed, bond markets close for part of the day
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.4% as of 1:25 p.m. New York time
- The Nasdaq 100 fell 1.3%
- The Dow Jones Industrial Average rose 0.2%
- The MSCI World index fell 0.6%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.5% to $1.0897
- The British pound fell 0.3% to $1.2459
- The Japanese yen rose 0.4% to 131.21 per dollar
Cryptocurrencies
- Bitcoin fell 0.7% to $28,071.21
- Ether rose 1.1% to $1,899.84
Bonds
- The yield on 10-year Treasuries declined five basis points to 3.29%
- Germany's 10-year yield declined seven basis points to 2.18%
- Britain's 10-year yield was little changed at 3.43%
Commodities
- West Texas Intermediate crude was little changed
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Srinivasan Sivabalan and Elizabeth Stanton.
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