By Caitlin Ostroff and Gunjan Banerji 

U.S. stocks dropped and Treasury prices tumbled as investors parsed comments from Federal Reserve Chairman Jerome Powell about the outlook for inflation and the central bank's views on rising bond yields.

The S&P 500 dropped 1.2% after two consecutive days of declines. The Nasdaq Composite fell 2.1%. The Dow Jones Industrial Average lost 320 points, or 1%.

Mr. Powell answered questions on how he views the jump in yields at The Wall Street Journal Jobs Summit and emphasized that the economy is far from reaching full employment. Central bank officials have previously said they would keep monetary policy loose until the economy is stronger, and that they view the rise in bond yields as a signal that investors are optimistic about the U.S. economic recovery.

The yield on the 10-year U.S. Treasury note jumped to 1.541% during his speech, on track for the highest closing level in at least a year. That level marks a steep climb from early January, when it was as low as 0.915%. Yields rise when bond prices fall.

The stock market has been taking cues from the government bond market. A recent selloff in U.S. sovereign debt has lifted Treasury yields, curbing investors' appetite for the technology stocks that had soared in a low-yield environment.

Some money managers are betting that additional fiscal stimulus in the U.S. will boost inflation and cause the Fed to raise interest rates sooner than they had expected. That has led to a jump in real yields, or the returns on bonds after adjusting for inflation expectations.

The Fed chair's comments will offer one of the last opportunities for markets to hear from key policy makers before a blackout period begins ahead of the next monetary policy review in mid-March.

"This is his real opportunity, prior to the next Fed meeting, to give investors clarity on how the Fed is viewing the bond market," said Hugh Gimber, a strategist at J.P. Morgan Asset Management.

Fresh data showed that 745,000 Americans applied for first-time unemployment benefits in the week ended Saturday, up from 736,000 the week prior. Economists surveyed by The Wall Street Journal had expected 750,000 jobless claims.

A key measure of investors' inflation expectations also surged recently. Five-year breakevens -- which reflect the expected pace of price increases over the five-year period that begins five years from now -- climbed above 2.5% for the first time in 13 years before closing at 2.487% Wednesday, according to Deutsche Bank.

Yields on Treasury inflation-protected securities, or TIPS, which are a proxy for the real yields, have also shot upward. The 10-year TIPS yield rose to minus 0.741% Thursday, from minus 1.089% at the end of last year, according to Tradeweb. It briefly closed as high as minus 0.635% at the end of February, when there was a wave of selling in the government bond market.

Expectations for U.S. economic growth have been bolstered by a proposed $1.9 trillion Covid-19 relief package. Senate Democrats agreed Wednesday to narrow eligibility for some of the direct payments that are part of the bill, a concession to centrists whose support is needed to pass it.

"You basically have fiscal stimulus feed through to consumption, which means earnings can go up and that will support equity markets," said Esty Dwek, head of global market strategy at Natixis Investment Managers.

She said she expects sectors like banks that would benefit from the economic reopening to perform well as investors exit richly valued technology stocks. "The headline numbers of the indexes sometimes mask that it has been more of a rotation in equities rather than out of equities," she said.

The stimulus package should also increase support for unemployed people, which will bolster consumer spending and the economic recovery, Ms. Dwek said.

Overseas, the pan-continental Stoxx Europe 600 fell 0.4%.

Most major Asian markets fell by the close of trading in a technology-led selloff that mirrored Wednesday's trading in the U.S.

Markets were weighed down by uncertainty over the pace of global economic recovery, as well as concerns that quickening inflation could eventually lead to higher interest rates, according to Justin Tang, the head of Asian research at United First Partners in Singapore.

"On one hand, you want the economy to grow, but the massive cash in the economy raises the boogeyman of inflation," he said. "I'm not sure if the economy can actually take higher interest rates at the moment. We are recovering, but I'm pretty sure we're not out of the woods yet," he added.

Mr. Tang said the recent pullback was reminiscent of 2018, when the tech sector sold off as bond yields rose, though he noted that episode quickly eased.

--Joanne Chiu contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

March 04, 2021 13:16 ET (18:16 GMT)

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