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The Dow rose and the S&P 500 ended lower in choppy trade on Friday, as beaten-down bank shares gained and investors grappled with how best to deal with an economy that could skid as the Federal Reserve moves to aggressively tackle inflation. The TSX ended with a modest gain, largely thanks to a rally in the energy sector.

The yield on the benchmark 10-year U.S. Treasury note hit a three-year high of 2.73%, helping boost the S&P banking index, which on Thursday had slumped to 13-month lows. The big rate-sensitive lenders all rose, with JPMorgan Chase & Co gaining 1.8%, Bank of America Corp 0.7%, Citigroup Inc 1.7% and Goldman Sachs Group Inc 2.3%.

That upward movement in bond yields was felt in Canada as well, where the country’s latest jobs report showed the unemployment rate hitting a record low of 5.3% in March. The economy added 73,000 positions last month, following a blowout return of 337,000 in February, Statistics Canada said.

The Canada 10-year government bond yield touched its highest since January 2014 at 2.647% before dipping slightly to 2.639%, up 6.4 basis points on the day.

And the Canada 5-year bond, which has heavy influence on the direction of fixed mortgage rates, rose to as high as 2.636% - its highest level in 11 years.

The sharp move higher in yields this week started on Tuesday after comments from dovish Fed Governor Lael Brainard shifted the market’s focus from rate hikes to the runoff of the Fed’s balance sheet.

“Right now the biggest theme is a momentum trade, where yields are pushing higher,” said Guy LeBas, chief fixed income strategist at Janney in Philadelphia.

The S&P/TSX composite index ended up 39.46 points, or 0.2%, at 21,874.35. For the week, the TSX dipped 0.4%. Still, it has advanced 3.1% since the start of the year, one of few major benchmarks to post gains.

“The TSX is really proving its worth at the present time when inflation is a big concern,” said Elvis Picardo, portfolio manager at Luft Financial, iA Private Wealth. “Allied to that is the expectation that rates are going to rise quite rapidly.”

As Russia’s invasion of Ukraine disrupts the global economy and drives up oil, gold and industrial metal prices, investors are embracing Canada’s commodity-linked stock market to protect their portfolios from the impact of supply shortages and soaring inflation.

Resource shares have a 27% weighting on the Toronto market, while financials account for 30%.

Financials, which tend to benefit from rising interest rates, rose 0.5% in Toronto, while the energy group added 2.1% as oil prices climbed. U.S. crude oil futures settled 2.3% higher at $98.26 a barrel.

The TSX materials group, which includes precious and base metals miners and fertilizer companies, rose 1.6%. Technology shares were a drag, falling 3.2%.

Since peaking at two-month highs in late March, Wall Street has trended lower as the Fed signals it will aggressively hike rates, leading investors to reposition their portfolios. Economically sensitive value shares this year have outperformed tech-heavy growth stocks, which often depend on low rates.

“We’re going into a very long-term and meaningful period of value outperforming growth. It’s not merely a cyclical adjustment, but a secular story,” said David Bahnsen, chief investment officer at wealth manager the Bahnsen Group in Newport Beach, California.

“The value-growth story is a big one and it is a byproduct of two things, which is what you want. Growth is overvalued and value is undervalued,” he said.

The Russell 1000 Value index rose 0.51% while the Russell 1000 Growth index fell 1.09% on the day.

Investors are weighing the probability of a recession with two outcomes. On the one hand, the Fed could engineer a “soft landing” with slowing but positive growth, making banks “woefully oversold,” said UBS bank analyst Erika Najarian.

Or a sharp slowdown is imminent, which would cause a knee-jerk bank share sale as “owning banks in a recession is no fun,” she said.

Big U.S. banks, which kick off the first-quarter results season next week, are expected to report a large decline in earnings from a year earlier, when they benefited from exceptionally strong dealmaking and trading.

“There’s always going to be a price at some point where people are going to step in and think things are cheap and they might buy,” said Randy Frederick, managing director, trading and derivatives, at Schwab Center for Financial Research.

“Perhaps a 52-week low was enough to entice some people into the financial sector,” Frederick said, noting the 10-year Treasury yield was at its highest level since March 2019.

The Dow Jones Industrial Average rose 137.55 points, or 0.4%, to 34,721.12, the S&P 500 lost 11.93 points, or 0.27%, to 4,488.28 and the Nasdaq Composite dropped 186.30 points, or 1.34%, to 13,711.00.

Volume on U.S. exchanges was 10.37 billion shares.

For the week, the S&P fell 1.16%, the Dow lost 0.28% and the Nasdaq shed 3.86%, as the index was hit after Fed officials raised concerns about rapid rate hikes causing a slowdown.

Shares of Tesla Inc, Nvidia Corp and Alphabet Inc fell between 1.9% and 4.5% as megacap stocks extended this week’s decline as the surge in Treasury yields weighed.

The NYSE FANG+TM index, which includes Inc and Apple Inc, fell 1.76% and semiconductor stocks slid 2.42%, extending the week’s decline.

Robinhood Markets Inc fell 6.88% after a report said Goldman Sachs downgraded the online brokerage, while Kroger Co jumped 2.99% on a ratings upgrade.

Declining issues outnumbered advancing ones on the NYSE by a 1.20-to-1 ratio; on Nasdaq, a 1.66-to-1 ratio favored decliners.

The S&P 500 posted 58 new 52-week highs and two new lows; the Nasdaq Composite recorded 53 new highs and 184 new lows.

Reuters, Globe staff

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