Just when you thought the stock market was ready to rally, Fed Chair Jerome Powell showed up to spoil the party.

Powell struck a hawkish tone in testimony to the Senate banking committee Tuesday, warning that the labor market remains "extremely tight" and that a cooling trend in inflation has reversed itself.

"As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in his prepared remarks. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

The stock market immediately interpreted that to mean a half-point rate hike is likely at this month's Fed policy meeting. Odds for a 50-basis-point rate increase went up above 60%.

The 10-year Treasury yield remained little changed at 3.97%. But the more policy-sensitive two-year Treasury yield jumped 12 points to 5.011%, the highest since June 2007.

At the same time, longer-term yields fell. "This divergence in yields has left the two-year/30-year spread inverted by more than a full percentage point," according to Tradeweb. The spread is at its most negative since at least mid-January 1998, when those securities began trading on Tradeweb.

The bond-market moves caused spillover effects in currency and commodity markets. The Invesco DB U.S. Dollar Bullish ETF, which tracks a dollar index, rose 1.2%.

U.S. crude oil slid 3.6% to $77.58 a barrel. Gold fell about 2%, silver futures dropped 4.6% and copper shed nearly 3%.

Stock Market Can't Tolerate Hawkish Powell

The stock market, which faded into Monday's close, had a predictable reaction Tuesday.

The S&P 500 slid 1.5%, edging below its 50-day moving average.

The Nasdaq composite fell nearly 1.3%. The Dow Jones Industrial Average lost 1.7% after meeting resistance at its 50-day line.

All three indexes fell below their 21-day exponential moving averages.

Volume fell on the NYSE and rose on the Nasdaq. That gave the composite a new distribution day, and now equals the S&P 500 with four days of higher-volume losses.

The stock market won't get a break from Fed influence Wednesday. Just as Powell starts his second day of congressional testimony, the job openings report comes out with a fresh look at the labor market. The ADP jobs report is released before the open.

On Friday, a big one lands when the Labor Department releases its February payrolls report. Then, on Tuesday morning, the new consumer price index report is released.

IBD 50 Outperforming Stock Market

The IBD 50 index performed relatively better, down just 0.3%.

In fact, the IBD 50 is outperforming the major indexes this year. It is up 12.4% compared with a 10.2% gain for the Nasdaq, 3.8% rise for the S&P 500 and 6.7% gain for the Russell 2000. The Dow is down for the year.

One advantage of the IBD 50 is that it sheds laggards and adds outperforming growth stocks. Thanks to its formulation, it is capable of capturing stock market leaders.

At a time when market leadership is fragmented, the IBD 50 serves as good source of ideas. Airlines, software, consumer, industrial and financial stocks make up the current leadership mosaic.

United Airlines is in buy range from its breakout past 53.36, and its relative strength line is at new highs. Copa has made moderate progress from its Jan. 13 breakout. Ryanair could be forming a new base.

Airlines, Consumer Companies In Stock Market Leadership

Airlines were mainly higher after the U.S. Justice Department went to court to block the JetBlue-Spirit Airlines merger.

Language-teaching app maker Duolingo is off to a great breakout in the IBD 50.

Graphic Packaging also is in a buy zone, despite tumbling in its first attempt at new highs.

Turf equipment maker Toro, today's IBD 50 Stocks to Watch pick, is forming a sound base ahead of Thursday's earnings report.

Axon Enterprise, Interactive Brokers and MercadoLibre also are part of the eclectic new leadership.

Dick's Sporting Goods is not in the IBD 50 but showed exceptional strength as it broke out to new highs in heavy volume. The retailer gapped up after beating January-quarter views and raising its dividend.

View General Market Indicator charts page.

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