Stocks, Bonds Rally With Focus on Rate Outlook: Markets Wrap

(Bloomberg) -- US stocks rallied on Tuesday as investors adjusted their expectations in response to Federal Reserve officials indicating that they’ll continue to raise interest rates but are open to slowing their tempo. 

The S&P 500 closed at its highest level since Sept. 12. The Nasdaq 100 rose more than 1%. Upbeat earnings from a handful of retailers including Best Buy Co. and Abercrombie & Fitch Co. boosted sentiment during the trading session. Nordstrom Inc., which reported lackluster results after markets closed, fell in late trading.

Treasuries rallied, with the benchmark 10-year yield around 3.76%. Oil rose amid an uncertain supply outlook alongside a proposal by the European Union to soften Russian crude sanctions. The dollar snapped a three-day climb. 

In recent days, Fed officials have broadly maintained their steadfast stance to fight inflation. Yet San Francisco Fed President Mary Daly also said that officials need to be mindful of the lags in the transmission of policy changes, while her Cleveland counterpart Loretta Mester said she’s open to moderating the size of rate hikes. On Tuesday, the Richmond Fed Manufacturing Survey came in slightly below expectations, with data confirming the peak inflation narrative. 

“We think the Fed leadership wants to get off the 75-basis-point-a-meeting hamster wheel even though it is finding it hard to do so while maintaining control of financial conditions,” Evercore ISI’s Krishna Guha wrote in a note. “We think the Fed is still heading for a ‘hawkish slowing.’ And, for us at least, the slowing part is what matters.”

Despite hints of moderation, the Fed is likely to raise its estimate of the terminal rate as early as December, in part because inflation may prove sticky, said Sonia Meskin, head of US macro at BNY Mellon Investment Management.

“I don’t know if I would read too much into the sort of daily repricing from the macro perspective at this stage, but I would be interested to see the labor market data for November and then any indication of whether this information weakening is sustained or not,” Meskin said by phone. “I think those would really be more indicative of the future of the policy trajectory.” 

Thanksgiving week in the US also tends to carry a “historically bullish tone” for stocks, Craig Johnson, chief market technician at Piper Sandler, said in a note. The week has started with a dip on Monday and then improves around the Thursday holiday about 68% of the time since 1950, he said. 

Read More: Fed’s George Says Higher US Savings May Mean Higher Rates Needed

Despite Tuesday’s rally, China’s Covid control restrictions are still weighing on investors. Shutdowns can have a negative impact on supply-chain dynamics and possibly exacerbate inflation issues across economies. These restrictions now impact a fifth of China’s economy. Chinese stocks listed in the US fell on Tuesday for a third straight session. 

Meanwhile, the OECD said the world’s central banks must continue to raise rates to fight inflation, even as the global economy sinks into a significant slowdown. The unexpected surge in prices and its impact on real incomes is hurting people everywhere, creating problems that will only worsen if policy makers fail to act, the Paris-based organization said.

Key events this week:

• S&P Global PMIs: US, Euro area, UK, Wednesday
• US MBA mortgage applications, durable goods, initial jobless claims, University of Michigan sentiment, new home sales, Wednesday
• Minutes of the Federal Reserve’s Nov. 1-2 meeting, Wednesday
• ECB publishes account of its October policy meeting, Thursday
• US stock and bond markets are closed for the Thanksgiving holiday, Thursday
• US stock and bond markets close early, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.4% as of 4 p.m. New York time
• The Nasdaq 100 rose 1.5%
• The Dow Jones Industrial Average rose 1.2%
• The MSCI World index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index fell 0.5%
• The euro rose 0.6% to $1.0300
• The British pound rose 0.6% to $1.1889
• The Japanese yen rose 0.6% to 141.24 per dollar

Cryptocurrencies

• Bitcoin rose 3.1% to $16,116.23
• Ether rose 3% to $1,126.48

Bonds

• The yield on 10-year Treasuries declined seven basis points to 3.76%
• Germany’s 10-year yield declined two basis points to 1.98%
• Britain’s 10-year yield declined five basis points to 3.14%

Commodities

• West Texas Intermediate crude rose 1.4% to $81.14 a barrel
• Gold futures were little changed

This story was produced with the assistance of Bloomberg Automation.

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