(Bloomberg) -- The stock market came under pressure once again, with Treasuries signaling growing concern about a recession next year amid an aggressively tight Federal Reserve policy.

In a session marked by unnerving swings in both directions, the S&P 500 suffered a fifth straight loss. Oil erased its 2022 gains on easing demand for fuels. Economic jitters were palpable among bond traders, with a key segment of the US curve reaching a four-decade extreme. Treasury 30-year yields sank to the lowest since September.

To Nicholas Colas at DataTrek Research, the spread between two and 10-year rates is extremely wide — and is “clearly spooking” equity traders. That’s a signal that markets believe the Fed policy is “very, very restrictive,” he noted. Curve inversions have a track record of preceding economic downturns by 12 to 18 months.

“The last time we were here was at the start of the ‘Volcker recession,’” and his Fed was already cutting rates,” Colas said. “Now we have a Fed that is still talking about ‘higher for longer’ rates. Markets are essentially saying there will be another man-made economic contraction soon: the ‘Powell recession’.”

Ark Investment Management’s Cathie Wood said the bond market appears to show that the Fed is making a “serious mistake” with its monetary policy. Deflation is a much bigger risk than inflation, she noted in a series of Tweets.

Bond-market gauges of inflation expectations have declined in recent weeks. The 10-year breakeven rate for Treasury inflation-protected securities is hovering around 2.3%, down from 2.6% in late October.

Read: Citi’s Fraser Warns US Likely to Enter Recession Next Year

A measure of labor cost growth reinforced the narrative that’s been benefiting Treasuries for the past month — that inflation has peaked. Meantime, mortgage rates fell for a fourth week in a row, the longest such stretch of declines since May 2019, as the Fed has signaled it will soon slow down the pace of tightening.

“Investors are worrying both that the economy may be too strong and that it may be too weak at the same time,” said Ed Yardeni, president of his namesake research firm. “The yield-curve spread between the 10-year and two-year Treasuries suggests that the Fed’s monetary policy tightening cycle is almost over. That’s either because a recession is imminent or because inflation is likely to keep falling, maybe without a recession.”

Those concerns are keeping the tug of war between equity bulls and bear in full force, with the latter having the upper hand. The S&P 500 this week breached a key uptrend line from its October lows, a sign that stocks still face more obstacles before there’s confirmation this year’s downtrend is broken.

To Savita Subramanian at Bank of America Corp., investors should stay invested in stocks despite growing warnings that the S&P 500 may sink to new lows in the first half of next year.

“Not having exposure to stocks and sticking all your money in bonds and cash is a mistake at this point,” she said. “I do think that we are going to go down and then up. The problem is, that is an increasingly consensus view. So I think the bigger risk heading into the first half is actually not being invested in equities.”

Also keeping a lid on risk assets Wednesday were comments from President Vladimir Putin, who warned that the threat of nuclear war in the world is rising, reiterating that Russia will defend itself and its allies “with all means if necessary.”

Key events this week:

  • ECB President Christine Lagarde speaks, Thursday
  • US initial jobless claims, Thursday
  • US PPI, wholesale inventories, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.2% as of 4 p.m. New York time
  • The Nasdaq 100 fell 0.5%
  • The Dow Jones Industrial Average was little changed
  • The MSCI World index fell 0.4%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.3%
  • The euro rose 0.4% to $1.0511
  • The British pound rose 0.7% to $1.2212
  • The Japanese yen rose 0.4% to 136.44 per dollar

Cryptocurrencies

  • Bitcoin fell 1% to $16,829.49
  • Ether fell 1.9% to $1,232.13

Bonds

  • The yield on 10-year Treasuries declined 12 basis points to 3.41%
  • Germany’s 10-year yield declined two basis points to 1.78%
  • Britain’s 10-year yield declined three basis points to 3.04%

Commodities

  • West Texas Intermediate crude fell 2.6% to $72.34 a barrel
  • Gold futures rose 1% to $1,799.90 an ounce

This story was produced with the assistance of Bloomberg Automation.

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