U.S. stocks slid after a renewed warning from Federal Reserve Chair Jerome Powell that higher rates would be needed to combat inflation, thwarting bets that the U.S. central bank was nearing the end of its tightening cycle.

The Nasdaq 100 has slumped more than 2 per cent  over the past three sessions. AI and chipmakers were weak with Intel Corp. and Avanced Micro Devices Inc. falling around 6 per cent  on Wednesday. The tech-heavy benchmark and the S&P 500 Index notched three-day losing streaks, the longest since early May. Two-year Treasury yields, considered the most sensitive to interest rates, rose to 4.7 per cent  following a bounce on a strong 20-year bond auction. 

Fed Chair Jerome Powell reiterated that higher rates are needed to combat inflation in his semi-annual report to Congress. Two more rate hikes this year is “a pretty good guess,” he said, while backing the central bank’s 2 per cent  inflation target.

Policymakers kept interest rates unchanged at their meeting last week, their forecasts imply around two additional quarter-point rate hikes or one half-point increase. Since then, money markets have been attaching roughly 80 per cent  odds to a quarter percentage point hike in July.

“Powell really was consistent with his messaging to Congress and by extension the markets,” said Joe Gilbert, a portfolio manager at Integrity Asset Management. “He reiterated that inflation is public enemy number one and the Fed must rein it in to provide stability to the system and stable growth for the economy. He is maintaining optionality even with another jobs report and CPI before the next Fed meeting.”

Amid the hawkish Fed signaling as well as crowded bullish positioning, narrow breadth and stretched valuations, the second-quarter stock rally has hit a wall as investor enthusiasm wanes. The market’s fear gauge, the Cboe Volatility Index or VIX, was strangely placid, dropping to the lowest since January 2020.

“The positioning and the chasing is no longer likely to be the big tailwind that it was for the last six or seven weeks. That’s why, things go parabolic, they don’t do so in perpetuity,” Anastasia Amoroso, chief investment strategist at iCapital, told Bloomberg Television’s The Open before Powell’s speech on Wednesday. 

“If the right catalyst comes along, they tend to correct, at least partially. And I think we’re looking at a catalyst this week, which is potentially hawkish Fed Chair Powell,” she said.

Wall Street is paying close attention to yields on the 10-year note — a drop in price is viewed as a sign of investor confidence in the economy — which reached its steepest inversion against the two-year note since the 1980s in March. 

If, “the 10-year starts to rise because all of the sudden the inflation expectations start to become more entrenched, that would certainty cause a problem for risk assets,” according to Amoroso.

“You wonder if the market wants to push back on the Fed, if Powell is not hawkish enough, if the Fed did not do enough for the market,” said Brian Weinstein, head of fixed income at Morgan Stanley Investment Management Inc.

“When I look at 10-year Treasuries, it’s not high enough yet. I’m surprised the yield curve hasn’t bear steepened if they want to challenge the Fed,” Weinstein told The Open. “Until we get higher yields on the longer part of the curve, I think people continue to buy riskier assets.”

Elsewhere, crude climbed above US$72 a barrel and Bitcoin rallied past US$30,000 for the first time since April amid speculation over BlackRock Inc.’s surprising filing for a U.S. spot Bitcoin exchange-traded fund.

Key events this week:

• Eurozone consumer confidence, Thursday
• Rate decisions in UK, Switzerland, Indonesia, Norway, Mexico, Philippines, Turkey, Thursday
• U.S. Conference Board leading index, initial jobless claims, current account, existing home sales, Thursday
• Fed’s Powell delivers testimony before the Senate Banking Committee, Thursday
• Cleveland Fed’s Loretta Mester speaks Thursday
• Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
• Japan CPI, Friday
• U.S. S&P Global Manufacturing PMI, Friday
• St. Louis Fed President James Bullard speaks, Friday

Some of the main moves in markets:  

Stocks

• The S&P 500 fell 0.5 per cent  as of 4:01 p.m. New York time
• The Nasdaq 100 fell 1.3 per cent
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index fell 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.3 per cent
• The euro rose 0.6 per cent  to US$1.0988
• The British pound was little changed at US$1.2776
• The Japanese yen fell 0.2 per cent  to 141.77 per dollar

Cryptocurrencies

• Bitcoin rose 7 per cent  to US$30,128.19
• Ether rose 5.5 per cent  to US$1,883.71

Bonds

• The yield on 10-year Treasuries was little changed at 3.72 per cent
• Germany’s 10-year yield advanced three basis points to 2.43 per cent
• Britain’s 10-year yield advanced seven basis points to 4.40 per cent

Commodities

• West Texas Intermediate crude rose 2 per cent  to US$72.63 a barrel
• Gold futures fell 0.1 per cent  to US$1,944.80 an ounce