(Bloomberg) -- Wall Street saw a renewed flight to safety, with bonds climbing and equities dropping after weaker-than-estimated economic data revived fears that a recession could be in store.

In a rotation away from growth shares, the Nasdaq 100 underperformed major benchmarks. Some of the most-speculative pockets of the market bore the brunt of the selling, with a gauge of newly minted stocks getting hit and a basket of profitless technology firms tumbling over 4%. Banks finished lower even after Western Alliance Bancorp’s deposit disclosure.

Treasury 10-year yields fell to the lowest since September, and were around 1.5 percentage points below the three-month Treasury bill rate — the widest margin in decades and historically a reliable signal that the economy is headed for a slowdown. The dollar rose alongside the Japanese yen. Gold was near a 13-month high.

“Recession risks have increased,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The equity outlook is challenging. As the slowdown of the US economy becomes more apparent, we think investors should prepare for a peak in interest rates by considering opportunities in bonds.”

To Ed Moya at Oanda, investors are realizing that a strong economy is needed to keep stocks higher. He also noted that equities aren’t selling off harder because many traders believe that even if the Fed doesn’t slash rates as soon as the market is pricing in, officials will cut them more aggressively next year. ​ ​ ​

Swap Market

The slide in Treasury yields subsided in afternoon New York trading, but the intense volatility underscored the market’s standoff with the Federal Reserve, which last month raised its benchmark to a 4.75%-5% range. In addition to favoring a pause in tightening — rather than a quarter-point hike in May — swap contracts linked to Fed meeting dates now anticipate the policy rate falling to 4% in December.

Policymakers speaking since the March meeting have said they are watching economic data to determine how much recent banking stress may tighten access to credit or slow growth. Fed Bank of Cleveland President Loretta Mester told Bloomberg Television that officials will need to raise rates “a little bit higher” and then hold them there for some time to bring inflation back toward their goal.

That doesn’t mean the Fed will continue to raise rates until inflation hits the target, Mester added.

For several market observers, one thing that might tilt the central bank toward the end of its hiking cycle is the fact that a year’s worth of interest-rate hikes might already be filtering through economic activity.

Still, even if the Fed pauses its rate hikes, “restrictive policy will continue to hit the economy with a lag,” according to Don Rissmiller at Strategas.

‘Whisper Fears’

In economic data, the Institute for Supply Management’s index fell nearly four points to a three-month low of 51.2. When paired with the latest ISM factory survey that showed a further deterioration, the data may heighten concerns about a downturn as credit conditions tighten and interest rates remain high.

While the magnitude of the decline in ISM services was certainly unexpected, the details don’t spell a “prelude to recession” just yet,” said Oscar Munoz at TD Securities. He says the numbers correspond to an economy that’s losing momentum and heading to below-trend growth in the near term.

Separate figures Wednesday from ADP Research Institute showed private payrolls increased by a less-than-expected 145,000. The data precede Friday’s US payrolls report amid forecasts employers added about a quarter of a million jobs last month and the unemployment rate held at a historically low level.

“ADP private employment tally was much weaker than expected, and with other high-frequency labor market metrics, suggests deteriorating labor-market growth,” said Stan Shipley at Evercore ISI. “Whisper fears suggest a tepid jobs report on Friday.”

To Bill Adams at Comerica Bank, while the recent jobs figures support a pause in Fed policy tightening, an upside surprise from next week’s inflation reports could still tip the balance toward another quarter-point rate increase.

“The labor market is getting less tight. This is one of the Fed’s conditions for pausing its interest rate hiking campaign, but the Fed also wants to see core inflation slow more,” Adams noted.

$1.5 Trillion

The wave of cash plowing into the safest of money-market mutual funds has only just begun with as much as another $1.5 trillion set to enter over the next year, according to Barclays Plc.

Coffers of government-only money funds, which invest just in securities with virtually no credit risk such as Treasury bills and repurchase agreements, have already ballooned since fears of a banking-sector crisis erupted last month. A continued exodus from banks and rotation out of prime funds, which can buy more risky debt, will only further fuel that trend as investors search for higher yields and greater safety, Barclays says.

Key events this week:

• US initial jobless claims, Thursday
• St. Louis Fed President James Bullard speaks, Thursday
• US unemployment, nonfarm payrolls, Friday
• Good Friday. US stock markets closed, bond markets close for part of the day

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3% as of 4 p.m. New York time
• The Nasdaq 100 fell 1%
• The Dow Jones Industrial Average rose 0.2%
• The MSCI World index fell 0.4%

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%
• The euro fell 0.4% to $1.0904
• The British pound fell 0.3% to $1.2460
• The Japanese yen rose 0.3% to 131.29 per dollar

Cryptocurrencies

• Bitcoin was little changed at $28,263.2
• Ether rose 1.7% to $1,910.55

Bonds

• The yield on 10-year Treasuries declined four basis points to 3.30%
• Germany’s 10-year yield declined seven basis points to 2.18%
• Britain’s 10-year yield was little changed at 3.43%

Commodities

• West Texas Intermediate crude fell 0.4% to $80.40 a barrel
• Gold futures were little changed

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Srinivasan Sivabalan and Elizabeth Stanton.

©2023 Bloomberg L.P.