Wall Street’s major equity indexes fell by more than 3 percent on Tuesday, led lower by bank and industrial shares, as the bond market sent unsettling signs regarding economic growth and Wall Street worried anew about global trade.

A prominent Federal Reserve official’s comments about the path of interest rate hikes added to the uncertainty for investors, as did setbacks for Britain’s plans to leave the European Union.

The S&P 500 posted its largest single-day percentage drop in about two months, giving back some gains from Monday and a week earlier, when the benchmark index chalked up its largest weekly percentage gain in nearly seven years. The small-cap Russell 2000 fell 4.4 percent, its largest one-day decline in more than seven years.

The focus of the day was on Treasury yields, where the benchmark 10-year yield fell to its lowest point since mid-September. The spread between the 10-year and its two-year counterpart also shrank to the smallest in over a decade.

The spread is a closely watched signal because a so-called yield curve “inversion,” when the two-year yields more than the 10-year bond, preceded all the recessions of the past 50 years.

Part of the curve did invert, with two-year and three-year yields holding above the five-year yield for a second day.

The New York Stock Exchange and Nasdaq will be closed on Wednesday, for a day of mourning for former President George H.W. Bush, who died on Friday at the age of 94.

Stocks had rallied on Monday following a truce between Trump and Chinese President Xi Jinping on their trade dispute following weekend talks in Argentina. However, but investor optimism over a resolution faded on Tuesday. Trump himself warned he would revert to tariffs if the two sides could not resolve their differences.

The S&P 500 financial index, which is particularly sensitive to bond market swings, fell 4.4 percent.

The trade-sensitive industrial sector index also fell 4.4 percent, with Boeing and Caterpillar declining 4.9 percent and 6.9 percent, respectively.

The defensive utilities index eked out a 0.2 percent gain, the only one of the 11 major S&P 500 sectors to end the trading day in positive territory.

In comments on Tuesday, New York Fed President John Williams said the Fed should expect to continue raising interest rates “over the next year or so” even while it pays close attention to possible risks highlighted by financial markets. The comments came after those from Fed chair Jerome Powell last week, which lifted stocks as they were interpreted as suggesting a less aggressive path of rate hikes.

Approximately 9 billion shares changed hands on the major domestic equity exchanges, a number that was well above the 7.7 billion share daily average over the past 20 sessions.

New York Fed – Economy Is Good

New York Fed President John Williams gave an optimistic review of the economy, reiterated his support for further gradual interest-rate increases and expressed no concern that market participants have dialed back expectations for policy tightening in 2019.

Markets moved sharply after Fed Chairman Jerome Powell said last week that the Fed is getting closer to its range of estimates for the neutral interest rate — the dividing line between tight and easy policy — and his phrasing was widely interpreted as a dovish signal.

Interest-rate futures pricing adjusted so that they’re now anticipating just one rate increase in 2019 following a hike at their meeting later this month. That’s at odds with the Fed’s Summary of Economic Projections from September, which suggests that officials see a rate increase this month and three more hikes next year. That forecast will be updated when officials gather Dec. 18-19 in Washington.

“My own view is completely consistent with what Chairman Powell, the economy is strong, but there are definitely” some “risks on the horizon,” Williams said Tuesday in a press briefing. The Fed is in a good position to react to whatever the economy does going forward, he said.

“There’s a good, like 50 percent, chance that the economy performs faster, inflation picks up a little bit more than we expect, and I think we’re positioned to adjust to that,” Williams said. “We’re well-positioned to adjust our path of interest rates if the economic data disappoint.”

Despite that nod to uncertainty, Williams painted an overwhelmingly positive picture of a strong economy that’s achieving the Fed’s goal of full employment. He said he expects tailwinds from fiscal stimulus to persist into 2019, and he thinks inflation will move slightly, but not dramatically, above the Fed’s 2 percent target.

“I expect with the economy continuing to grow nicely above-trend, we’ll see further job gains, further declines in the unemployment rate, and unemployment will edge slightly below 3.5 percent over the next year or so,” he said. “I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and sustained achievement of our dual mandate goals.”

As the economy improves, the Fed will need to reconsider how much guidance it’s providing, Williams said. The central bank will get to a situation “where it’s not as obvious that we are going to be raising interest rates at a gradual pace over time,” he explained.

“Then it will be appropriate to further step back on how much explicit forward guidance we give in statements,” he said, though he said the dot plot and press conferences will continue to provide a “transparent and comprehensive view” of the Fed’s outlook.

One “open question” is how low unemployment can remain without stoking hotter inflation, the New York Fed chief said. Unemployment is currently at 3.7 percent, well under the 4.5 percent that Fed officials have penciled in as the long-run sustainable rate.

“Right now, I think we’re in a great position,” Williams said. “We’re in a good position to allow the unemployment rate to be below 4 percent for the next few years without concern about inflation pressures picking up.”

Against that backdrop, he suggested it’s OK to continue testing the limits. “Over the next couple of years, we are going to continue to learn whether maybe a lower unemployment rate is sustainable without creating inflationary pressures,” he said.

Trump Whipsaws Markets

The White House turned to a familiar playbook after his high-stakes dinner with Chinese President Xi Jinping on Saturday: boast of a big victory first and let a more nuanced reality sink in later.

Trump followed the same script after trade talks with the European Union and Canada and his nuclear summit with North Korea’s Kim Jong Un. His optimistic comments can send markets soaring, before investors realize the president’s claims of success may have been exaggerated.

The pattern played out again with auto stocks this week. Shares of General Motors, Ford Motor., Daimler and BMW surged Monday after Trump tweeted: “China has agreed to reduce and remove tariffs on cars coming into China from the U.S.” But by late Tuesday morning, Trump not only acknowledged there was no deal but questioned whether one was possible. He declared himself “Tariff Man.”

Shares reversed course. By early Tuesday afternoon, the Dow Jones Industrial Average was down more than 700 points and the S&P 500 was down more than 3 percent, as investors grew skeptical that there was any meaningful breakthrough on trade.

It’s not the first time Trump has whipsawed markets, especially carmakers. Trump claimed victory after a July meeting with the European Union’s Jean-Claude Juncker, as he agreed to hold off on imposing tariffs on auto imports from Europe if progress was made in negotiations over a limited trade deal.

He also claimed that the EU agreed “to purchase almost immediately large amounts of American soybeans” as exports of the commodity were hit by the trade war with China.

The EU Rose Garden truce prompted a bounce in the shares of European carmakers that was short-lived. And the EU’s soybean commitment turned out to be no more than modest bargain-hunting.

The small increase in purchases of American beans that followed was attributable to a collapse in prices caused by the trade war with China, not a new deal with the U.S.

The larger trade negotiations with the EU are expected to begin in earnest only next year. Trump has resumed his threats to impose tariffs on European cars, calling German automakers in for a summit at the White House on Tuesday.

Trump is in a similar position with Japan. He portrayed as a major accomplishment an agreement with Japanese prime minister Shinzo Abe to start trade talks early next year. But one key condition of a deal is that Tokyo won’t give U.S. farmers any more access to the Japanese market than it negotiated with the Obama administration as part of TPP talks that dragged on for years.

After November’s midterm elections Trump was back to issuing threats. He greeted a Japanese reporter with: “Say hello to Shinzo. I’m sure he’s happy about tariffs on his cars.”

Even when he’s finalized a deal, Trump is inclined to embellish. After he signed a replacement deal for NAFTA, Trump declared it “a model agreement that changes the trade landscape forever.”

While it included some significant changes, particularly to auto content rules, the final deal amounted to a rebranding exercise – it is now called the U.S. Mexico Canada Agreement. It also borrowed heavily from another deal that Trump scorned, the 12-country Trans-Pacific Partnership from which he withdrew in one of his first acts in office.

Republican and Democratic lawmakers scoffed at Trump’s portrayal of the NAFTA replacement.

“You know 95 percent of what we will be voting on is the same as NAFTA,” Iowa Senator Chuck Grassley told reporters in October. Nancy Pelosi, the top Democrat in the House, mocked “the trade agreement formerly known as Prince, no, I mean, formerly known as NAFTA”.

The president’s hyping of his trade deals echoes his nuclear diplomacy with North Korea’s Kim. At a historic June summit in Singapore, Trump repeatedly described the document he and Kim signed as “comprehensive,” and he hailed the North Korean leader’s commitment to remove nuclear weapons from the Korean peninsula.

But few meaningful details, such as a timeline, were ever provided. And since then, talks have appeared to stall. The most recent sign of trouble was the test of a new “advanced tactical” weapon by Pyongyang last month — the first such demonstration in almost a year and a pointed signal to the U.S. and South Korea.

Yet Trump is publicly unfazed. He has continued to claim that Pyongyang is no longer a threat and said on his way back from his meeting with Xi in Buenos Aires that he is planning a summit with Kim as soon as January.