Stocks slide despite strong economic data

Investors expect Fed to keep raising interest rates aggressively.

NEW YORK— A swift jump in Treasury yields Wednesday rattled Wall Street, weighing down stock indexes at the start of another month in what’s been a turbulent year.

The S&P 500 fell 0.7% after an early morning gain quickly vanished. Stocks began their slide immediately after the release of several reports on the U.S. economy, including one showing manufacturing growth was stronger last month than expected. That bolstered investors’ expectations for the Federal Reserve to continue raising interest rates aggressively to slow the economy in hopes of reining in inflation. Treasury yields rose sharply, sending the yield on the 10-year note up to 2.92%.

Such swings have become routine on Wall Street amid worries that too-aggressive rate hikes by the Fed may force the economy into a recession. Even if it can avoid choking off the economy, higher rates put downward pressure on stocks and other investments regardless. High inflation is meanwhile eating into corporate profits, while the war in Ukraine and business-slowing, ANTI-COVID-19 restrictions in China have also weighed on markets.

The Fed has signaled it may continue raising its key short-term interest rate by double the usual amount at upcoming meetings. Speculation built last week that the Fed may consider a pause at its September meeting, which helped stocks to rise. But such hopes diminished after Wednesday’s manufacturing report from the Institute for Supply Management.

It showed U.S. manufacturing growth accelerated last month, contrary to economists’ expectations for a slowdown. A separate report said that the number of job openings across the economy ticked a bit lower in April but remains much higher, at 11.4 million, than the number of unemployed people.

Following the reports, traders are now betting on a 60% probability that the Fed will raise its benchmark short-term rate to a range of 2.25% to 2.50% at its September meeting. A week ago, the majority of bets were on a lower level, at a range of 2% to 2.25%, according to CME Group.

The yield on the two-year Treasury, which tends to follow expectations for Fed moves, jumped with those expectations. It rose to 2.65%, up from 2.56% just before the manufacturing report’s release.