US stocks lost steam on Wednesday after the Federal Reserve held rates steady but suggested soft inflation data this year may prove to be short lived.

The S&P 500 closed at session lows, falling 0.8 per cent for its worst one-day retreat since March 22. The benchmark had been up as much as 0.3 per cent following the Fed’s rate decision and recorded a fresh intraday record earlier in the session. The tech-heavy Nasdaq fell for a second consecutive day, dropping 0.6 per cent.

Fed chair Jay Powell said a recent drop in price growth, while unexpected, may be transient — comments that were viewed by investors as damaging to the potential case for a rate cut this year. He added that officials don’t currently see a strong case for either lifting or cutting the Fed’s target rate, reaffirming a “patient” approach to monetary policy.

“If inflation stays as it is or worsens then there will come a point when the Fed will have to justify why they aren’t cutting rates,” said Luke Bartholomew, investment strategist at Aberdeen Standard Investments. “Some policymakers have flagged core inflation of 1.5% as a crucial level which might justify easing policy, and we are already pretty close to these levels.”

A rally in Treasuries fizzled following Mr Powell’s remarks, with yields only slightly lower. The yield on the 10-year note was down 0.2 basis points at 2.5053 per cent after earlier testing its lowest levels in about a month.

The greenback also firmed, with the US dollar index up 0.2 per cent.

Stocks had been mostly higher heading into Mr Powell’s news conference. Earnings from Apple helped the mood, with shares in the iPhone maker up 4.9 per cent after it lifted its revenue forecasts.

Investors also parsed new data from payroll processor ADP, which said US private employers added 275,000 jobs in April — easily beating economists’ expectations and marking the largest monthly increase since July 2018.

But a disappointing survey on US manufacturers — showing the weakest pace of growth in the sector since October 2016 — kept a lid on gains and pushed the US dollar and Treasury yields lower.

“We’ve been seeing a slowdown in global trade all year and a slowing pace of US manufacturing that is now being reflected in the numbers,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Snapshot

Level+/- %
Euro vs dollar$1.1191-0.2
Sterling vs dollar$1.3045+0.1
London’s FTSE 100 stocks7,385.26-0.4
German 10-year Bund yield0.013%0
S&P 5002,923.73-0.75
US 10-year Treasury yield2.5017%-0.5 bps

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