Volatility gripped Wall Street as traders kept a close eye on any signs of a potential escalation of the Middle East conflict, while weighing Jerome Powell’s remarks for clues on the policy outlook.

After multiple twists and turns, the S&P 500 notched its third straight loss. A U.S. base in Syria was targeted by drones, while a U.S. destroyer intercepted cruise missiles and drones in Yemen, incidents that caused minor injuries but prompted fresh concerns that Israel’s war with Hamas may spark a wider conflict. Tesla Inc. sank over 9 per cent on disappointing results. 

Treasury 10-year yields approached 5 per cent, while two-year rates fell after Powell said the Federal Reserve will proceed carefully with rate hikes, while citing evidence that policy isn’t “too tight.” Swaps trimmed the implied odds of another Fed rate increase to just under 50 per cent, and priced a start to cuts in July, compared with September previously. 

“Jay Powell is putting to bed any chance of a Nov. 1 rate hike. As to not let markets get carried away though, he left the door open for more rate hikes,” said Peter Boockvar, author of the Boock Report. “Short rates are falling as they are likely done, but the rise in long rates is proving again that they are losing their grip on that part of the market.”

“The Fed is not yet convinced about where inflation will settle over the next few quarters, which means that the committee will not pre-commit,” said Jeffrey Roach, chief economist for LPL Financial. “Each meeting will be a live meeting.”

Powell also said he recent run-up in bond yields appears to be mostly due to rising term premiums, “and so the type that tightens financial conditions, rather than the type of move the Fed needs to follow through on,” said Krishna Guha, vice chairman of Evercore. 

“He agreed that ‘at the margin’ this could substitute for the need for the Fed to raise rates further,” Guha noted. “But his comments lacked any urgency to lean against the rise in yields.”

Fed Bank of Chicago President Austan Goolsbee said he’s hopeful the U.S. is able to avoid a recession despite rapid and steep interest-rate hikes over the past 18 months. He emphasized the need for the Fed to ensure inflation was on track to ease to its 2 per cent goal and for inflation expectations to stay anchored.

Thursday’s economic reports were mixed. Applications for U.S. unemployment benefits dropped to the lowest level since January as the labor market kept powering ahead. Sales of previously owned U.S. homes fell to the lowest level since 2010 as affordability worsened even further.

Elsewhere, a system “incident” halted trading in hundreds of shares on the London Stock Exchange for the final 80 minutes of Thursday’s session.

Corporate Highlights

• Netflix Inc. surged after posting its best quarter for subscriber growth in years.
• American Airlines Group Inc. topped expectations for profit even as its forecast for the rest of the year fell short.
• Union Pacific Corp. reported profit that topped analysts’ estimates, which had been adjusted down in the last month, as the railroad leaned on efficiency to make up for lower carloads and higher labor costs.
• AT&T Inc. raised its free cash flow guidance for the full year after posting mobile subscriber gains and profit that beat analysts’ estimates.
• Lam Research Corp.’s revenue fell for a third straight quarter, a sign demand for chipmaking equipment remains sluggish.
• Blackstone Inc., grappling with higher interest rates and stung by a pullback in dealmaking, reported a 12 per cent decline in quarterly profit available to shareholders.
• Las Vegas Sands Corp. authorized its first share buyback program since 2020, signaling management’s confidence in the business after years of pandemic-related hardship.

Key events this week:

• Japan CPI, Friday
• China loan prime rates, Friday
• Philadelphia Fed President Patrick Harker speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.9 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.8 per cent
• The Dow Jones Industrial Average fell 0.7 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 0.5 per cent to US$1.0587
• The British pound was little changed at $1.2148
• The Japanese yen was little changed at 149.81 per dollar

Cryptocurrencies

• Bitcoin rose 1.8 per cent to $28,775.9
• Ether rose 0.4 per cent to $1,569.01

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 4.98 per cent
• Germany’s 10-year yield was little changed at 2.93 per cent
• Britain’s 10-year yield advanced two basis points to 4.67 per cent

Commodities

• West Texas Intermediate crude rose 2.5 per cent to $90.50 a barrel
• Gold futures rose 0.9 per cent to $1,986.80 an ounce