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Shares of USA steelmakers jumped but industrial heavyweights like Boeing and Caterpillar fell as investors anxious about higher raw material costs and trade barriers elsewhere.
Those comments sent the Dow Jones industrial average down by 299 points as investors grew more concerned about rising interest rates.
"Fundamental demand is still really good", said Timothy Fiore, chairman of the Institute for Supply Management factory-survey committee. European Commission President Jean-Claude Juncker said Europe will respond "firmly" to any new tariffs.
Canada said it would retaliate if the United States imposes tariffs on Canadian steel and aluminum products, Foreign Affairs Minister Chrystia Freeland said on Thursday. Prices of U.S. Treasuries were mixed. "It would raise the price for items that use steel and aluminum".
Market reaction was muted.
The Standard & Poor's 500 index was up 3 points, or 0.1 percent, to 2,717.
Losses in industrial and health care stocks are pulling major US indexes lower in morning trading on Wall Street.
The yen also rallied after Bank of Japan Governor Haruhiko Kuroda said the BoJ would consider an exit from its ultra-easy monetary policy if it met its inflation target in the year ending in March 2020. "All of those stocks that have steel or metal, they slid up".
Chuck Carlson, chief executive at Horizon Investment Services in Hammond, Indiana said the market is nervous about future USA inflation and the imposition of tariffs may accentuate those concerns.
TESTIMONY MOVING MARKETS. The chart on the left shows the S&P 500 (SPX) during Powell's testimony, compared to the Cboe Volatility Index (VIX), charted as the purple line.
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"Bonds are providing a nice shock absorber here", said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments.
Earlier in the session, the dollar hit a six-week high after a set of solid US economic data stoked expectations of four rate hikes by the Fed. "Now, however, it appears that bond yields have risen sufficiently high to allow them to provide a buffer on bad days for stocks".
Investors were also focused on the level of optimism Federal Reserve Chairman Jerome Powell expressed about economic growth: The stronger his optimism, the more likely the USA central bank will become more aggressive in raising the benchmark lending rate to restrain inflation.
Following the Fed's meetings can give investors an idea of what's going on throughout the US economy and might provide an explanation for any heightened volatility they might see in their portfolios.
"This is a continuation of where this Fed was under Chair Yellen", said Robert Albertson, principal and chief strategist at Sandler O'Neill & Partners in NY. The rosy forecast caused investors to raise the odds the Fed may go further and raise rates four times this year.
Elsewhere, the United Kingdom pound extended a decline and the nation's bonds rose after the European Union published a draft Brexit treaty, with Prime Minister Theresa May squaring off for a fight. The Australian dollar dropped after business investment unexpectedly fell in the final three months of a year ago. Other Fed speakers this week are Bill Dudley.
The S&P 500 fell 35.32 points, or 1.3 percent, to 2,744.28.
The Dow Jones Industrial Average dropped 1.7 percent, or 427 points, to 24,597.83. Australia's S&P/ASX 200 sank 1 percent to 5,914.00. The Fed's preferred price gauge - tied to consumption - rose 0.4 percent in January from the previous month and was up 1.7 percent from a year earlier, according to the Commerce Department. Eastern time. It had been up as much as 0.6 percent earlier in the day.
The British pound gained 0.1 percent to $1.3773.
The 10-year Treasury yield held just below 2.9%. February snapped a 10-month winning streak for the Dow.
West Texas Intermediate crude decreased 0.4 percent to $61.38 a barrel.
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