Dow climbs over 400 points, Nasdaq looks to snap historic losing streak as investors weigh Fed speeches, Beige Book

U.S. stocks traded sharply higher on Wednesday afternoon as investors weighed in on remarks by Federal Reserve Vice Chairman Lael Brainard and other top Fed officials as they reviewed the central bank’s latest compilation of economic anecdotes.

What is happening
  • The Dow Jones Industrial Average
    DJIA,
    +1.50%

    rose 447 points, or 1.4%, to 31,591.

  • S&P 500
    SPX,
    +1.83%

    added 68 points, or 1.7%, to trade at 3,976.

  • Nasdaq
    comp,
    +2.10%

    advanced 220 points, or 1.9%, to trade at 11,765.

On Tuesday, the Nasdaq Composite fell 0.7%, marking its seventh straight daily decline and marking its longest losing streak since 2016. The Dow Jones fell 173 points, or 0.6%, while the S&P 500 declined 0.4%.

What drives the markets

Brainard, the central bank’s No. 2 official, said Wednesday The Federal Reserve will need to raise interest rates further and keep them high for some time to “provide confidence that inflation is moving down towards the target”.

“We’re in it for as long as it takes to reduce inflation,” Brainard said in a speech to a conference hosted by The Clearing House and the Banking Policy Institute. Stock market investors took the comments in stride, with major indexes hitting new session highs after Brainard’s remarks.

Shares shook off the pre-market jitters seen after the report published by The Wall Street Journal said Federal Reserve Chairman Jerome Powell’s commitment to reducing inflation even if it increased unemployment appeared to put the central bank on track to raise interest rates by 0.75 percentage points instead of half a percentage point when policymakers meet on -late this month.

Traders had already largely priced in a move of 75 basis points. Fed funds futures traders estimated an 80% chance of a 75 basis point move after the report, up from 73% on Tuesday, according to CME FedWatch tool.

“I still think they’re doing 75 basis points, just because the market is largely price smart — they’re taking it and seeing what happens.” But at least for me, inflation is set to turn around and probably quite badly,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management. “My concern is that the Fed thinks they need to keep hiking longer than they really need to because I think it’s starting to run out.”

The Fed’s Beige Book survey showed the U.S rose slightly by the end of Augustbut the outlook for the economy next year “remains broadly weak” due to rising interest rates and labor and supply shortages. The report is released eight times each year before the Federal Open Market Committee meets and helps the Fed make key decisions about the economy.

According to the report, “significant price increases were reported in all areas, particularly for food, rent, utilities and hospitality.” Meanwhile, employment is growing at a modest to moderate pace in most areas. “Overall, labor market conditions remained difficult, although nearly all areas saw some improvement in labor availability.”

Stocks retreated sharply from their mid-August highs as a summer rally ended as Federal Reserve officials signaled they were unlikely to move away from higher interest rates in 2023.

“Today’s bounce in isolation may seem odd,” said Keith Buchanan, portfolio manager at GLOBALT Investments. But context also matters, he said, especially with the market’s sharp reversal in the past two weeks as more investors abandoned the idea that the Fed would abandon its fight against inflation.

“I don’t necessarily think it’s the markets that are reviewing or questioning the Fed’s conviction,” he said in an interview.

A sharp jump in government bond yields pressured stocks on Tuesday. The benchmark 10-year yield
TMUBMUSD10Y,
3.273%

rose 15 basis points, the biggest one-day gain in a month. Yields edged lower on Wednesday, with the 10-year yield down 7.7 basis points to 3.271%.

The US dollar
dxy,
-0.35%

hit a new 20-year high on Wednesday, just short of the 111 level.

Thus, investors are evaluating the latest data on the US economy, as well as efforts by European governments to mitigate the impact of rising energy prices.

The US trade deficit fell 12.6% in July to a nine-month low of $70.6 billion, adding to growing evidence that the US has not slipped into recession in the first half of 2022.

In the past week, before Fed officials enter a shutdown period ahead of their Sept. 20-21 policy meeting, investors have been poring over speeches for more clues about future rate hikes.

Cleveland Federal Reserve President Loretta Mester said Wednesday that the economy will experience sluggish economic growth this year and next, but she did not discuss whether she supports another 0.75 percentage point rate hike at the meeting or a delay to a half-rate increase percentage point.

Powell will participate in a moderated discussion on Thursday, and Fed Governor Christopher Waller is scheduled to speak on Friday.

Bank of Canada raised its overnight target rate by three-quarters of a percentage point to 3.25%, after a surprise increase of a full percentage point in July. The European Central Bank may raise interest rates to 75 basis points on Thursday.

Companies in focus
  • Target Corp.
    TGT,
    +4.70%

    he said it was wednesday abolish the retirement policy, clearing the way for current CEO Brian Cornell, 63, to stay on for about three more years. Target shares rose 3.2%.

  • Shares of Twitter Inc.
    TWTR,
    +5.94%

    jumped 5.2% Wednesday, after The Wall Street Journal reported that a judge has ruled that Elon Musk can amend his counterclaim against the social media company he agreed to buy for $44 billion to include a whistleblower report, but denied Musk’s request to delay the trial for November.

  • Shares of United Airlines Holdings Inc.
    UAL,
    +5.33%

    grew by 2.1%. after the air carrier raised its third-quarter revenue growth forecastciting continued “strong” demand after coming off a “strong” summer.

  • Nio Inc.
    NIO,
    +2.72%

    shares rose 3.2% despite reports from the China-based electric vehicle maker larger than expected loss in the second quarter as revenues rose above forecasts but gross margins contracted and provided a poor outlook for earnings.

  • Apple Inc
    AAPL,
    +0.77%

    the biggest event of the year started on wednesday with CEO Tim Cook saying the consumer electronics giant will focus on its iPhone, Apple Watch and AirPods lines with updates. Apple shares were little changed.

– Steve Goldstein contributed to this report.

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