The stock market sank in the final stretch of April and bond yields climbed on concern that stubborn inflation will force the Federal Reserve to keep interest rates higher for longer.

On the eve of the Fed decision, a broad gauge of U.S. labor costs closely watched by policymakers jumped the most in a year. The data signaled wage pressures, reinforcing bets that officials will keep rates unchanged at a two-decade high Wednesday — and are unlikely to lower them anytime soon. That perception combined with a plunge in consumer confidence weighed heavily on equities — which suffered their worst month since September.

“The markets are in full fear-mode going into tomorrow’s Fed announcement,” said Andrew Brenner at NatAlliance Securities. “Rates won’t go down in the near future and equities are having trouble justifying their prices.”

The last time Fed Chair Jerome Powell spoke he pointed to the lack of further progress in bringing inflation down, and to enduring strength in the labor market. The latest inflation signals — in tandem with expectations for a robust employment report on Friday — aren’t likely to lead him to change his tune.

The S&P 500 fell 1.6 per cent, the most since January. In late hours, Amazon.com Inc. reported strong sales for its cloud unit amid rising artificial-intelligence demand. Advanced Micro Devices Inc., the second-biggest maker of computer processors, gave a lukewarm revenue forecast for the current period.

Treasury two-year yields topped 5 per cent — the highest level since November. The dollar notched its fourth consecutive monthly advance — the longest winning run since September 2022.

“Stocks, bonds, and the dollar are all frontrunning the possibility of a frowning Powell at tomorrow’s interest rate decision,” said Jose Torres at Interactive Brokers. “This morning’s data justifies an increasingly hawkish committee.”

A survey conducted by 22V Research shows that only 16 per cent of investors polled expect a “risk-on” reaction to Wednesday’s Fed decision, 44 per cent said “risk-off,” and 40 per cent “negligible/mixed.” The tally also revealed that two thirds of respondents still expect a rate cut in 2024.

“With inflation data continuing to be surprisingly hot for the past quarter, the narrative that these surprises are all attributable to ‘one offs’ in individual components is becoming harder to sustain,” said Joe Davis at Vanguard. “Time will tell, but the data suggest that what we call a ‘deferred landing’ is more likely than the long anticipated ‘soft landing’.”

To Krishna Guha at Evercore, the disappointment on wages will make the Fed less confident in the outlook for inflation.

“This will manifest itself in a harder tone,” he said “with policymakers clearly open to a more extended hold beyond the initial delay for the first cut from June to July/ September — if there is not a clear stepdown in inflation in the coming months.”

Sticky U.S. inflation this year isn’t necessarily bad news for the stock rally as higher yields are a reflection of strong economic growth, according to HSBC strategists led by Max Kettner.

“If the Fed’s cuts turn out to be more like the recalibration in the mid-1990s and 2019, it may not necessarily be bad news for risk assets,” they wrote.

Bank of America Corp. clients posted their largest inflows to U.S. equities in eight weeks during the five-day period ended Friday.

All major client groups — institutions, hedge funds, and retail investors — were net buyers last week, quantitative strategists led by Jill Carey Hall said in a note to clients Tuesday. Net inflow totaled US$3 billion, largest in two months, per BofA.

The recent rebound in equity markets was not driven by a change in investor flows, but rather by the unwind of profitable bearish positions, Citigroup Inc. strategists led by Chris Montagu wrote.

They also noted that the bounce couldn’t continue on de-risking flows alone — and should be supported by new bullish inflows.

Despite its reputation, May has historically been a positive month for the equity market, although gains have been backend-loaded towards the last week of the month, according to Bespoke Investment Group.

May tends to be a positive month with an average gain of 0.93 per cent dating back to 1983 and 0.68 per cent over the last 10 years, the firm said.

“The six months from May through October haven’t necessarily been a negative period for equities, but historically, it is the weakest six-month stretch on the calendar,” Bespoke noted.

Corporate Highlights:

• McDonald’s Corp. results fell short of expectations in the first quarter, hampered by slowing growth in the U.S. and the reverberations of the Israel-Hamas war.
• Coca-Cola Co. issued a more optimistic 2024 forecast after first-quarter results outpaced Wall Street’s expectations as customers in markets around the world continue to pay higher prices and drive volume growth.
• 3M Co. plans to slash its dividend, ending more than six decades of boosting the payout each year as it enters a new era following the spinoff of its health-care products division.
• Eli Lilly & Co.’s brighter outlook for 2024 raised the potential ceiling for new weight-loss drugs even further in the eyes of analysts and investors.
• PayPal Holdings Inc.’s payment volume climbed 14 per cent in the first quarter on increased consumer spending globally, giving a boost to the firm’s shares in early trading.
• Meta Platforms Inc.’s social media platforms Facebook and Instagram are under investigation from the European Union amid concerns they’re failing to cull targeted disinformation peddled by Russia that aims to sow discord on the continent.
• Walmart Inc.’s deal to buy smart-TV maker Vizio Holding Corp. will undergo an in-depth antitrust review by the Federal Trade Commission, Vizio said Tuesday.
• Archer-Daniels-Midland Co. warned of pressured margins for the remainder of the year, even as quarterly earnings beat estimates.

Key events this week:

• Holiday across much of Europe, Wednesday
• Treasury’s quarterly refunding announcement, Wednesday
• U.S. ADP employment change, JOLTS job openings, ISM Manufacturing, Wednesday
• Federal Reserve rate decision, Wednesday
• Eurozone S&P Global Manufacturing PMI, Thursday
• U.S. factory orders, initial jobless claims, trade, Thursday
• Apple earnings, Thursday
• Eurozone unemployment, Friday
• U.S. unemployment, nonfarm payrolls, ISM Services, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.9 per cent
• The Dow Jones Industrial Average fell 1.5 per cent
• The MSCI World index fell 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.6 per cent
• The euro fell 0.5 per cent to $1.0672
• The British pound fell 0.5 per cent to $1.2495
• The Japanese yen fell 0.9 per cent to 157.72 per dollar

Cryptocurrencies

• Bitcoin fell 5.5 per cent to $59,476.83
• Ether fell 7.4 per cent to $2,941.03

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 4.68 per cent
• Germany’s 10-year yield advanced five basis points to 2.58 per cent
• Britain’s 10-year yield advanced six basis points to 4.35 per cent

Commodities

• West Texas Intermediate crude fell 1.2 per cent to $81.60 a barrel
• Spot gold fell 1.8 per cent to $2,292.50 an ounce