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Nasdaq weak as manufacturing stokes Fed concerns

The S&P 500 and Nasdaq fell for a second consecutive session on Wednesday as Treasury yields jumped after manufacturing data indicated inflation is likely to remain stubbornly high, while comments from Federal Reserve policymakers supported a hawkish policy stance.

The yield on 10-year notes topped 4.0 per cent for the first time since November, reaching a high of 4.006 per cent, after the Institute for Supply Management's (ISM) survey showed US manufacturing contracted in February and prices for raw materials increased last month.

After the data was released, the two-year US Treasury yield, which typically moves in step with interest rate expectations, gained on the day after reaching 4.904 per cent, its highest since 2007.

"You could see the market kind of deteriorated a little bit, yields started climbing after that February ISM manufacturing report. Prices paid component, that really jumped, broke a four-month streak of price declines," said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, referring to the ISM Manufacturing Prices Paid Index which is seen as an inflation indicator.

"That is just another piece of evidence we have seen over the past couple of weeks that inflation is remaining stickier than what most people thought in January," he said, adding it was likely the Fed is going to move rates higher.

Saglimbene added the bond market has recently been indicating there is a greater chance the Fed could move the terminal rate somewhere close to 6.0 per cent.

The Dow held near the unchanged mark as Caterpillar shares rose after the construction equipment maker said it had reached a tentative deal with a union that represents workers at four of its facilities.

Fed funds futures showed traders added to bets the US central bank will raise its benchmark rate to a range of 5.5-5.75 per cent by September, from the current range of 4.5-4.75 per cent.

Further fuelling concerns about central bank aggressiveness, Minneapolis Fed President Neel Kashkari, a voter in the rate-setting committee in 2023, said he is "open-minded" on either a 25 basis point or a 50 basis point rate hike in March.

Atlanta Fed President Raphael Bostic said in an essay that while a federal funds rate between 5-5.25 per cent would be adequate, the policy would have to remain tight "well into 2024" until inflation is clearly subsiding.

After a strong January, the main US benchmarks stumbled in February on growing expectations the Fed will increase rates more than initially thought as segments of the economy such as the labour market remain tight, while inflation has not ebbed as quickly as anticipated.

US monthly payrolls and consumer prices data in the coming days will further help investors gauge the path of rates ahead of the March 21-22 meeting, when the Fed is largely seen hiking rates by 25 basis points.

Energy and materials sectors were among the few winners in the session as commodity prices gained after data showed China's manufacturing activity expanded at the fastest pace in more than a decade as the country continues to leave its COVID-19 restrictions behind.

Tesla Inc slipped ahead of its investor day event. The electric automaker is readying a production revamp of its top-selling Model Y, Reuters reported, citing people familiar with the plan.

Novavax Inc plunged after the COVID-19 vaccine maker raised doubts about its ability to remain in business and announced plans to slash spending as it prepares for an autumn vaccination campaign.