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Stocks turned sharply negative in afternoon trading Thursday as traders nervously watched bond yields rise yet again to multi-year highs and Chair Jerome Powell left little doubt that an aggressive 50-basis-point hike looms at the Federal Reserve’s next policy meeting.

The Canadian benchmark stock index lost nearly 1.6%, its biggest daily percentage decline since Jan. 21, and closed at a five-week low. All 10 of the TSX’s major sectors lost ground. The S&P 500 lost nearly 1.5%.

A half-point interest rate increase will be “on the table” when the Federal Reserve meets on May 3-4 to approve the next in what are expected to be a series of rate increases this year, Powell said Thursday. With inflation running roughly three times the Fed’s 2% target, “it is appropriate to be moving a little more quickly,” he said in a discussion of the global economy at the meetings of the International Monetary Fund.

The Fed chair also said he felt investors currently anticipating a series of half-point hikes were “reacting appropriately, generally,” to the Fed’s emerging fight against rising prices.

Earlier on Thursday, San Francisco Federal Reserve President Mary Daly said she supports raising the U.S. central bank’s target for overnight borrowing costs to 2.5% by the end of this year, but whether or how much further it will need to rise will depend on what happens with inflation and labor markets.

The remarks by Fed officials hijacked initial momentum which the markets received from positive earnings. All three major U.S. indexes opened higher, boosted by strong results from heavyweight Tesla and airline operators.

However, gains were eroded through the morning session and the S&P 500 and Nasdaq had already reversed course by the time Powell spoke. The TSX largely tracked those moves during the session.

“The Fed speakers overall today have been, I would say, moderately more hawkish,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. “I think what is becoming very evident is that the Fed wants to get back to neutral expeditiously.”

The neutral rate is seen as neither accommodative nor restrictive, and is currently estimated at around 2.5%.

The Fed is expected to hike rates by 50 basis points at each of its next three meetings, and will likely announce plans to reduce its US$9 trillion balance sheet at its May meeting. Fed funds futures traders are pricing for the Fed’s benchmark rate to rise to 1.79% in July, and to 2.89% next February, from 0.33% now.

Losses in bond funds are adding to investor reluctance to step in as yields continue to march higher, and could result in further selling if it continues.

“There are a lot of concerns about bond fund outflows,” said TD’s Goldberg. “It is keeping people away from trying to catch the bottom. In this environment it’s like trying to catch knives - the risk/reward is not there.”

Benchmark 10-year U.S. Treasury yields were last at 2.900%. They reached a high of 2.981% on Wednesday, the highest since December 2018. Two-year yields, which are highly sensitive to interest rates, reached 2.730% on Thursday, also the highest since December 2018, before dipping back to 2.666%.

Canada’s 5-year bond yield was at 2.836% by late afternoon Thursday, up 8 basis points, after earlier hitting 2.871% - its highest in 12 years. Fixed mortgage rates are heavily influenced by the 5-year bond, suggesting higher rates still to come by lenders. Variable mortgage rates generally follow what the Bank of Canada does with its trend-setting overnight rate - and it too is expected to rapidly raise rates this year.

On Bay Street, technology, which tends to be particularly sensitive to higher rates, fell 3%, with e-commerce giant Shopify Inc falling to its lowest level since April 2020.

Energy was down 3.6% even as the European Union mulled a potential ban on Russian oil imports, boosting the price of oil , while the materials group, which includes precious and base metals miners and fertilizer companies, lost 4.1%.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 347.97 points at 21,650.41.

The Dow Jones Industrial Average fell 368.03 points, or 1.05%, to 34,792.76, the S&P 500 lost 65.79 points, or 1.48%, to 4,393.66 and the Nasdaq Composite dropped 278.41 points, or 2.07%, to 13,174.65.

High-growth stocks, including those of Alphabet Inc and Inc, fell as investors fretted about how the higher rate environment would impact their future growth potential. Meta Platforms Inc declined 6.2%, taking its losses in the last two days to 13.5%.

Netflix Inc slumped 3.5%, taking its market capitalization below the $100 billion mark for the first time since January 2018. It was the second day of declines for the streaming giant after its quarterly earnings revealed a first drop in subscriber numbers in a decade, with further falls likely.

The forecast prompted William Ackman to liquidate a $1.1 billion bet on Netflix, with the billionaire investor writing the firm’s future was too uncertain to hold onto his position.

The 1.7% fall in the broader technology index was one of the worst among the sectors, with all 11 major industries ending lower. Energy was hit the hardest, despite crude prices gaining.

Alcoa Corp was another to slide after posting results. The aluminum producer tumbled 16.9%, its biggest fall since March 2020, as the Russia-Ukraine conflict impacted its business.

There were some bright spots though. Tesla, the world’s most valuable automaker, rose 3.2% after its results beat Wall Street expectations as higher prices helped it overcome supply-chain chaos and rising costs.

Airline stocks also maintained their recent momentum. United Airlines Holdings Inc and American Airlines Group Inc climbed 9.3% and 3.8%, respectively, after they predicted a return to profit in the current quarter due to booming travel demand.

The volume on U.S. exchanges was 12.27 billion shares, compared with the 11.65 billion average for the full session over the last 20 trading days. The S&P 500 posted 78 new 52-week highs and 16 new lows; the Nasdaq Composite recorded 73 new highs and 367 new lows.

With files from Reuters

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