Stocks drop Friday as rate pause hopes fade

Stocks and bonds floundered after Wall Street lost faith that a pause in the Federal Reserve’s rate hiking cycle was a given.

Swaps traders are now pricing in a one-in-10 chance there will be another interest rate hike at the next Fed meeting in June, after odds had been tilted in favor a pause earlier in the week.

The S&P 500 ended the week down 0.3% while the Nasdaq 100 eked out a 0.6% advance.

Early in the session gains were stamped out Friday after a preliminary University of Michigan sentiment survey showed consumers expect prices to rise at a 3.2% annual rate over the next five to 10 years, a 12-year high.

Bank stocks were weak with PacWest Bancorp dropping 3.0% and JPMorgan Chase sliding 1.4%.

A renewed call to raise the debt limit from Treasury Secretary Janet Yellen added to investor consternation Friday.

“If Congress fails to do that, it really impairs our credit rating,” she said in a Bloomberg Television interview. “We have to default on some obligation, whether it’s Treasurys or payments to Social Security recipients.”

Despite the Federal Reserve’s most aggressive tightening cycle in decades, inflation is still too high, Chicago Fed President Goolsbee said in PBS interview.

“You don’t want to land the plane nose down. So we’re trying to balance off – can we slow the inflation without sending it into a recession.”

Yields on the policy-sensitive two-year climbed to 3.99% while the 10-year rose to 3.46% Friday.

Stocks seesawed in a tight range this week as investors await a signal the Fed’s rate hiking cycle is at an end.

U.S. data Thursday showed initial jobless claims reached the highest since October 2021 while producer prices rose less than economists expected, suggesting policy tightening may finally be having an effect.

“This market has been flat because we’re in this world where we know the risk of recession is high, but we’re not seeing the whites of the eyes of it in hard data, and that’s why we continue to have this sideways chop,” Cameron Dawson, chief investment officer at Newedge Wealth, said Friday on Bloomberg Television.

Wall Street has been eying 4,200 as a key resistance level for the S&P 500. The risk is that the market moves higher, according to Dawson.

“The technicals, the sentiment positioning could get us above that and really make it a very big pain trade,” he said.

Solar stocks outperformed with First Solar leading a rally after new guidance on a clean energy tax credit increase.

The dollar notched its biggest weekly gain since February as investors embraced its safe haven status while Bitcoin dropped below $27,000.

In emerging markets, attention is turning to Turkey’s elections Sunday.

Banking stocks rallied in Istanbul, notching their best weekly performance since 2002, when incumbent President Recep Tayyip Erdogan’s Ak Party rose to power.

Some investors expect the opposition to restore more orthodox monetary policy should it gain power.