Treasury yields dropped after some Federal Reserve officials signaled a potential pause in interest-rate hikes as early as June.

Two-year rates, which are more sensitive to imminent Fed moves, slumped seven basis points to 4.38 per cent. The S&P 500 pared losses while remaining below 4,200. Some of the big tech names that have led the recent rally lost traction — with Nvidia Corp. down 4 per cent. The SPDR S&P Regional Banking ETF slumped 3 per cent, with traders sifting through Federal Deposit Insurance Corp.’s remarks that the number of lenders with weaknesses increased in the first quarter.

Fed Governor Philip Jefferson signaled the central bank is inclined to keep interest rates steady at its next meeting in June to give policymakers more time to assess the economic outlook, but such a decision wouldn’t mean hikes are finished. His remarks were echoed by Philadelphia Fed President Patrick Harker, who said: “I think we can take a bit of a skip for a meeting.”

Policymakers are carefully assessing how their tightening campaign over the past 14 months, which brought interest rates to a range of 5 per cent to 5.25 per cent from near zero, is affecting the economy. The U.S. showed signs of cooling in recent weeks as hiring and inflation eased slightly, the Fed said in its Beige Book survey of regional business contacts.

Earlier in the day, equities extended losses as the Labor Department’s so-called JOLTS report showed vacancies at employers unexpectedly surged to over 10 million. The figures reinforced speculation the Fed would have room for another interest-rate hike by July — boosting the odds of a hard landing. Earlier figures from China and Europe also added to concerns about a downturn.

“We’re facing quite a lot of headwinds: firstly, the China growth story, clearly that’s been a major disappointment. On top of that, there’s a risk of a U.S. recession, and for the euro region, there’s a likelihood that they’re facing stagnation,” Jane Foley, head of currency strategy at Rabobank, said on Bloomberg Television. “So you’ve got a pretty disappointing outlook for growth, not an environment where you really want to be piling en masse into high-risk assets.”

The NYSE FANG+ Index of megacaps like Tesla Inc. and Microsoft Corp. halted a four-day advance, while heading toward its best month since January with a 17 per cent surge.

NARROW BREADTH

While many on Wall Street say that doesn’t mean the enthusiasm for the sector will fade, there’s been growing concern about the fact that other industries haven’t been able to catch up in a meaningful way.

“Much of this year’s stock market rally has been driven by only a few technology stocks, and this is not a dynamic that is typically seen at the start of bull markets,” said Robert Schein, chief investment officer, Blanke Schein Wealth Management. “We need the participation of other sectors, and narrow market breadth is not sustainable over the long term.”

Schein expects the outsized performance of big tech to be tempered in the coming quarters. While the combination of a debt-ceiling deal and a Fed pause could propel the market higher, any strength would be short-lived as investors start pricing in lower earnings estimates, he noted.

“If one is realistic, we believe that it is hard to argue that the rest of the stock market can catch-up to the big-cap tech sector, with a credit crunch looming in the US and the growth in China fading in a serious manner,” said Matt Maley, chief market strategist at Miller Tabak.

‘EXTREMELY VULNERABLE’

To Jonathan Krinsky at BTIG, equities remain “extremely vulnerable” as the market heads into the last month of the quarter.

“By now, everyone is well aware of the market’s breadth problem, and we think June will show the risks when the weak remain weak, and the strong unwind lower,” Krinsky added.

In other corporate news, Hewlett Packard Enterprise Co. tumbled 7 per cent after projecting revenue for the current quarter that fell short of analysts’ estimates. Advance Auto Parts Inc. plunged 35 per cent on a bearish outlook. American Airlines Group Inc. dropped 0.5 per cent even after boosting its profit forecast.

Traders also watched the latest developments in U.S. debt-ceiling negotiations, with Republican and Democratic leaders expressing confidence that compromise legislation to avert a catastrophic US default will pass the House of Representatives Wednesday night on the backs of moderates.

“Those planning for a relief rally following the passage of the debt ceiling increase may be disappointed,” said Mark Hackett, chief of investment research at Nationwide. “The next move higher for equities will require improving data and a shift in investor confidence.”

Elsewhere, the U.S. dollar rose, making commodities priced in the currency more expensive for international investors. West Texas Intermediate crude deepened its slide below $70 a barrel. ICE Brent futures were also lower.

The crypto rebound is also losing steam, leaving Bitcoin on course for its worst month since the FTX exchange collapsed in November last year. The roughly 8 per cent drop in May is Bitcoin’s first monthly retreat of 2023.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.4 per cent as of 2:29 p.m. New York time
• The Nasdaq 100 fell 0.3 per cent
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index fell 0.7 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro fell 0.6 per cent to US$1.0675
• The British pound rose 0.2 per cent to $1.2436
• The Japanese yen rose 0.4 per cent to 139.29 per dollar

Cryptocurrencies

• Bitcoin fell 2.5 per cent to $27,076.01
• Ether fell 2 per cent to $1,866.03

Bonds

• The yield on 10-year Treasuries declined six basis points to 3.63 per cent
• Germany’s 10-year yield declined six basis points to 2.28 per cent
• Britain’s 10-year yield declined six basis points to 4.18 per cent

Commodities

• West Texas Intermediate crude fell 2 per cent to $68.08 a barrel
• Gold futures rose 0.4 per cent to $1,985.10 an ounce