Dow, S&P 500 score best day in a month and Nasdaq snaps 7-day losing streak despite flurry of hawkish Fed talk
By Isabel Wang and Frances Yue
'We are in this for as long as it takes to get inflation down,' says Fed's Brainard
U.S. stocks finished sharply higher on Wednesday, with all three benchmarks posting their best day of gains in about a month, as investors assessed remarks by Federal Reserve Vice Chair Lael Brainard and other Fed officials, while digesting the central bank's latest compilation of economic anecdotes.
On Tuesday, the Nasdaq Composite dropped 0.7%, logging 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 drove markets
Brainard, the No. 2 official at the central bank, said on Wednesday that the Fed will need to raise the policy rate further and keep rates at high levels for some time to "provide confidence that inflation is moving down to target."
"We are in this for as long as it takes to get inflation down," Brainard said in a speech at a conference hosted by The Clearing House and Bank Policy Institute. Stock-market investors took the comments in stride, with major indexes ticking up to new session highs following Brainard's remarks.
Stocks shook off a premarket wobble seen after a report published by The Wall Street Journal said Federal Reserve Chairman Jerome Powell's commitment to reducing inflation even if it increases unemployment appeared to put the central bank on track to hike interest rates by 0.75 percentage point, rather than half of a percentage point, when policy makers meet later this month.
Traders had already largely priced in a 75 basis point move. Fed-funds futures traders priced in an 76% chance of a 75 basis point move following the report, up from 73% on Tuesday, according to the CME FedWatch tool.
"I still think they do 75 basis points, just because the market is largely price smart --they take it and they see what happens. But to me at least, inflation is set to roll over and possibly pretty hard," said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management. "My worry is that the Federal Reserve thinks they have to keep hiking longer than what they really need to, because I do think it is starting to wear off."
The Fed's Beige Book survey showed the U.S. grew slightly through end the August, but the outlook for the economy over the next year "remained generally weak" because of rising interest rates and nagging labor and supply shortages. The report is published eight times each year before the Federal Open Market Committee meetings and helps the Fed make key decisions about the economy.
According to the report, "substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services." Meanwhile, employment rose at a modest to moderate pace in most districts. "Overall labor market conditions remained tight, although nearly all Districts highlighted some improvement in labor availability."
See:Why the stock market's June lows 'need to be back in the conversation,' according to one technical analyst
Stocks have retreated well off their mid-August highs as a summer bounce was brought to an end as Federal Reserve officials signaled they were unlikely to pivot away from higher interest rates in 2023.
"Today's bounce, in isolation might seem strange," said Keith Buchanan, portfolio manager at GLOBALT Investments. But context also matters, he said, particularly with the market's sharp reversal in the past two weeks as more investors abandoned the idea of the Fed backing off its inflation fight.
"I don't necessarily think that this is the markets looking through or doubting the Federal Reserve's conviction," he said, in an interview.
A sharp surge in Treasury yields pressured stocks on Tuesday. The benchmark 10-year yield rose 15 basis points, the largest one-day climb in a month. Yields pulled back Wednesday, with the 10-year rate down 8.6 basis points to 3.264%.
The U.S. dollar hit a new 20-year high on Wednesday just shy of the 111 level.
See:U.S. stocks rise 15% on average one year after midterms, analysts find
That's as investors assess the latest data on the U.S. economy, as well as the efforts by European governments to mitigate the impact of surging energy prices.
The U.S. trade deficit fell 12.6% in July to a nine-month low of $70.6 billion, adding to mounting evidence confirming the U.S. did not fall into a recession in the first half of 2022.
In the final week before Fed officials enter a blackout period ahead of their Sept. 20-21 policy meeting, investors were parsing speeches for more clues on future interest rate hikes.
Cleveland Fed President Loretta Mester said Wednesday that the economy will experience slow economic growth this year and next, but she did not discuss whether she favored another 0.75 percentage point rate hike at the meeting or slowing down to a half-percentage point increase.
Powell will participate in a moderated discussion on Thursday, and Fed Gov. Christopher Waller is due to speak on Friday.
The Bank of Canada lifted its overnight target rate by three-quarter percentage points to 3.25%, following a surprise increase of a full percentage point in July. The European Central Bank could lift rates as much as 75 basis points on Thursday.
Companies in focus
----Steve Goldstein contributed to this report.
(END) Dow Jones Newswires
September 07, 2022 16:40 ET (20:40 GMT)
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