US Stock Market: Dow Jones, S&P 500, Nasdaq retreat from day's highs amid higher-for-longer interest rate woes

The S&P 500 and Nasdaq fell for a second straight session on Wednesday as Treasury yields jumped after manufacturing data indicated inflation is likely to remain stubbornly high, while comments from Federal Reserve policymakers supported a hawkish policy stance.

The yield on 10-year notes topped 4% for the first time since November, reaching a high of 4.01%, after the Institute for Supply Management's (ISM) survey showed U.S. manufacturing contracted in February and prices for raw materials increased last month.

After the data was released, the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, gained on the day after reaching 4.904%, its highest since 2007. It was last up 8.4 basis points at 4.881%.

"You could see the market kind of deteriorated a little bit, yields started climbing after that February ISM manufacturing report. Prices paid component, that really jumped, broke a four-month streak of price declines," said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, referring to the ISM Manufacturing Prices Paid Index which is seen as an inflation indicator.

"That is just another piece of evidence we have seen over the past couple of weeks that inflation is remaining stickier than what most people thought in January," he said, adding it was likely the Fed is going to move rates higher.

Saglimbene added the bond market has recently been indicating there is a greater chance the Fed could move the terminal rate somewhere close to 6%.

The Dow Jones Industrial Average (.DJI) rose 5.14 points, or 0.02%, to 32,661.84, the S&P 500 (.SPX) lost 18.76 points, or 0.47%, to 3,951.39 and the Nasdaq Composite (.IXIC) dropped 76.06 points, or 0.66%, to 11,379.48.

The Dow held near the unchanged mark as Caterpillar (CAT.N) shares rose 3.81% after the construction equipment maker said it had reached a tentative deal with a union that represents workers at four of its facilities.

Fed funds futures showed traders added to bets the U.S. central bank will raise its benchmark rate to a range of 5.5%-5.75% by September, from the current range of 4.5%-4.75%.

Further fueling concerns about central bank aggressiveness, Minneapolis Fed President Neel Kashkari, a voter in the rate-setting committee in 2023, said he is "open-minded" on either a 25 basis point or a 50 basis point rate hike in March. Atlanta Fed President Raphael Bostic said in an essay that while a federal funds rate between 5% to 5.25% would be adequate, the policy would have to remain tight "well into 2024" until inflation is clearly subsiding.

After a strong January, the main U.S. benchmarks stumbled in February on growing expectations the Fed will increase rates more than initially thought as segments of the economy such as the labor market remain tight, while inflation has not ebbed as quickly as anticipated.

U.S. monthly payrolls and consumer prices data in the coming days will further help investors gauge the path of rates ahead of the March 21-22 meeting, when the Fed is largely seen hiking rates by 25 basis points.

Energy (.SPNY) and materials (.SPLRCM) sectors were among the few winners in the session as commodity prices gained after data showed China's manufacturing activity expanded at the fastest pace in more than a decade as the country continues to leave its COVID-19 restrictions behind.

Tesla Inc (TSLA.O) slipped 1.43% ahead of its investor day event. The electric automaker is readying a production revamp of its top-selling Model Y, Reuters reported, citing people familiar with the plan.

Novavax Inc (NVAX.O) plunged 25.92% after the COVID-19 vaccine maker raised doubts about its ability to remain in business and announced plans to slash spending as it prepares for a fall vaccination campaign.

Volume on U.S. exchanges was 11.00 billion shares, compared with the 11.39 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 1.32-to-1 ratio; on Nasdaq, a 1.29-to-1 ratio favored decliners.

The S&P 500 posted 9 new 52-week highs and 13 new lows; the Nasdaq Composite recorded 79 new highs and 114 new lows.