US stocks drift lower after expectations rise for the Fed to hike rates to get handle on inflation

Key Points:

• U.S. stocks declined modestly on Friday amid rising expectations that the Federal Reserve will soon increase interest rates to combat persistent inflation, with the S&P 500 down 0.3% and the Nasdaq falling 0.5%.
• Federal Reserve Governor Kevin Warsh emphasized the use of short-term interest rates as the primary tool to control inflation and indicated that current financial conditions may not yet be restrictive enough to slow the economy.
• The yield on the two-year Treasury note, which reflects expectations for Fed rate hikes, rose sharply following Warsh’s speech, with traders now assigning nearly a 60% probability to a rate increase next month.
• Gap’s stock surged nearly 13% after reporting stronger-than-expected quarterly profits and announcing new leadership for its Old Navy division, while Marvell Technology shares dropped 10% despite positive earnings and raised revenue forecasts, amid concerns that AI-related growth expectations may already be priced in.
• European stock markets mostly advanced, contrasting with mixed results in Asia, where South Korea’s Kospi declined 1.8%, highlighting varied regional investor sentiment.