Stocks slip as rate worries overshadow big bank profits

NEW YORK (AP) — Stocks on Wall Street dipped Friday as worries about interest rates overshadowed an encouraging start to earnings reporting season for big U.S. companies.

The S&P 500 fell 8.58 points, or 0.2%, to 4,137.64 after giving up an early gain. The Dow Jones Industrial Average lost 143.22, or 0.4%, to 33,886.47, while the Nasdaq composite sank 42.81, or 0.4%, to 12,123.47.

The S&P 500 still squeezed out a fourth winning week in the last five, built in part on hopes the Federal Reserve may soon end its barrage of rate hikes as inflation cools. High interest rates can stifle inflation but only by slowing the economy, raising the risk of a recession and dragging on prices for investments.

A top Fed official dampened those hopes Friday after saying inflation remains far too high and more tightening may be needed. Christopher Waller, a member of the Fed’s governing board, also said that even after hikes to rates end, they will likely need to stay high for longer than markets expect.

After his comments, traders built bets that the Fed will raise rates at its next meeting in May, instead of taking its first pause in more than a year. Some also began betting the Fed may hike rates again in June, according to data from CME Group.

High-growth stocks tend to be among the most hurt by high rates, and Big Tech stocks were among the heaviest weights on the S&P 500. Microsoft fell 1.3%.

Swaths of the economy have already begun slowing under the weight of higher interest rates, raising worries that a recession may be likely. A report on Friday showed U.S. shoppers cut their spending at retailers by more last month than expected. Much of that was due to falling gasoline prices, and the drop for what economists call “core retail sales” wasn’t as bad as forecast.

“The Fed’s challenge has been to cool inflation without putting the economy into a deep freeze in the process,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “The dynamic is still playing out in the markets, and we could see more choppy price action as a result.”

Potentially making things more difficult for the Fed was another report Friday that said U.S. households are girding for higher inflation. Consumers are expecting inflation over the next year of 4.6%, up from expectations for 3.6% a month earlier, according to a preliminary survey by the University of Michigan.

That could be troublesome, as the Fed has long feared entrenched expectations of high inflation could lead to a vicious cycle that keeps it high. Longer-term expectations for inflation, though, remain stable and clocked in at 2.9% for a fifth straight month, according to the survey.

All the worries helped push Treasury yields higher. The 10-year Treasury yield rose to 3.51% from 3.45% late Thursday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield moves more on expectations for the Fed, and its gain was sharper, up to 4.10% from 3.97%.

Helping to offset some of the worries about rates were big gains by several of the nation’s biggest banks. They reported profits for the first three months of the year that blew past expectations.

They helped kick off the reporting season for big U.S. companies, where expectations are mostly dismal. Despite such worries, JPMorgan Chase jumped 7.6% after its profit surged by more than half from a year earlier.

It benefited from the strains unearthed in the banking system last month that shook global markets. Those worries pushed some customers to pull cash from smaller banks and move it to bigger ones.

Citigroup rose 4.8% after it also reported stronger profit than expected. BlackRock, the world’s largest asset manager, rose 3.1% after its earnings likewise topped forecasts.

Boeing was one of the heaviest weights on the S&P 500. Its stock slid 5.6% after the aircraft maker said Thursday that production and delivery of a “significant number” of its 737 Max planes could be delayed because of questions about a supplier’s work on the fuselages.

Boeing said the supplier, Spirit AeroSystems, used a “non-standard manufacturing process” during installation of fittings near the rear of some 737s. Boeing said the situation is not an immediate safety issue and planes already flying “can continue operating safely.”

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AP Business Writers Joe McDonald and Matt Ott contributed.