Wall Street slips again as rally runs out of steam

Traders work on the floor at the New York Stock Exchange in New York, Wednesday, June 14. AP-Yonhap

Wall Street is retreating a bit more Wednesday as its five-week rally loses momentum.

The SP 500 was 0.4 percent lower in midday trading. It's on pace for a third straight pullback after rallying last week to its highest level in more than a year. The Dow Jones Industrial Average was down 9 points, or less than 0.1 percent, at 34,044, as of 11 a.m. Eastern time, while the Nasdaq composite was 1.2 percent lower.

The SP 500 has been on a tear this year and rallied nearly 14 percent amid hopes that inflation is coming down quickly enough for the Federal Reserve to stop hiking interest rates soon, which could allow the economy to avoid falling into a long-expected recession. But some analysts say stock prices have run too far, too fast when inflation has remained stubbornly high and the Fed may have to keep rates higher for longer.

Fed Chair Jerome Powell said Wednesday that "the process of getting inflation back down to 2 percent has a long way to go.” He said the Fed is likely to slow down its rate increases after hiking them at a furious rate since early last year but that a couple more may still be on the way.

“Given how far we've come, it may make sense to move rates higher but to do so at a more moderate pace,” he said in testimony before a House of Representatives committee. He likened it to slowing down from 75 miles per hour on a highway to 50 and then even slower as the destination nears.

High rates have already helped cause three high-profile failures in the U.S. banking system. And the industry remains under pressure, even after the federal government acted quickly to provide support.

Smaller and regional banks account for about 50 percent of U.S. commercial and industrial lending, according to Ann Miletti, head of active equity at Allspring Global Investments. And pressure on these banks would make it tougher for smaller and midsized businesses to get loans, which would hurt the economy.

Miletti said she's leaning toward the probability of a coming U.S. recession because of how much the Fed has already raised rates in such a short time. She said the recession may not be very deep, but it could still last longer than many predict.

“Inflation is retreating,” she said, “but it won't be a smooth decline.”

In the bond market, yields rose as Powell spoke. The yield on the 10-year Treasury climbed to 3.77 percent from 3.72 percent late Tuesday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, rose to 4.73 percent from 4.69 percent.

Higher interest rates drag on all kinds of stocks, bonds and other investments. But high-growth stocks tend to be some of the hardest hit, and several Big Tech stocks were among the heaviest weights on the market.

A smartphone with a displayed NVIDIA logo is placed on a computer motherboard in this illustration taken March 6. Reuters-Yonhap

Nvidia slumped 3.9 percent, giving back some of its spectacular gains from earlier this year driven by Wall Street's frenzy around the artificial-intelligence industry. The chip maker is still up more than 188 percent for the year so far after saying AI would result in a tremendous leap in its revenue.

FedEx was also helping to weigh on the market after it gave a forecast for upcoming earnings that looked low against some analysts' expectations. Its stock fell 1.7 percent despite reporting stronger profit for the latest quarter than Wall Street forecast.

Winnebago Industries fell 1.7 percent after it also reported stronger profit for the latest quarter than expected but weaker revenue than forecast.

In markets abroad, stocks continued to tumble in China amid worries about a stumbling recovery for the world's second-largest economy. The Hang Seng in Hong Kong fell 2 percent for its second straight sharp drop after the Chinese government cut some interest rates by less than some investors had hoped.

Stocks in Shanghai fell 1.3 percent, and Korea's Kospi dropped 0.9 percent.

In Europe, stock indexes were modestly lower.

The FTSE 100 in London dipped 0.2 percent after a U.K. report on inflation came in hotter than expected. That raised speculation that the Bank of England will hike interest rates again at its meeting Thursday. (AP)