(Bloomberg) — U.S. stocks rose as corporate profits continued to rise and economic data came in better than expected. Treasuries fell after aggressive comments from Federal Reserve officials made it clear that a policy turnaround is unlikely.
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The gains set the tone for stocks, with strong reports from PayPal Holdings Inc. and Moderna Inc. lifting the Nasdaq 100 up 2.3% and the S&P 500 up 1.3%. The recent data also eased concerns about a broader economic slowdown, as growth in the US services sector unexpectedly strengthened to a three-month high in July.
The 10-year Treasury yield rose to 2.8% as swap markets showed traders were now pricing in a 50% chance of a three-quarter percentage point rate hike in September. The 10-year rate had slumped to 2.5% on expectations that the rate increase would be smaller.
Bonds continued to sell off as investors recalibrated expectations about the Fed’s rate hike path. Treasuries rose last week after Chairman Jerome Powell signaled that the pace of future hikes could slow later. this year, raising the odds of cuts next year in market-implied measures. Since then, several Fed officials have said the central bank is far from done with tightening and remains focused on reining in price gains that are the highest in four decades.
“If there is a change of tone from Fed members, it is akin to a parent finally telling their children they have had enough candy, no more,” wrote Peter Boockvar, chief investment officer at Bleakley Financial Group. “For decades, the Fed always gave the markets more candy, especially when kids were crying out for it. Now, the kids are going to have to fend for themselves while inflation is at the very unsatisfactory levels it is showing, even with an expected drop.”
Markets are also a bit calmer after US-China tensions eased when House Speaker Nancy Pelosi left Taiwan. Her visit drew an angry response from China, and markets were on edge before her arrival on Tuesday.
US stocks rose after a session with many twists and turns on Tuesday. But stock trading doesn’t reflect the headwinds the market is facing, according to Goldman Sachs Group Inc. strategist Sharon Bell.
“There is a bit of complacency there and the markets are not fully accounting for the risks,” Bell said in an interview with Bloomberg TV.
Tight liquidity during the summer break also tends to magnify small market moves, said April LaRusse, director of investment specialists at Insight Investments.
“Sometimes that can make it seem more exciting than it really is when you think about the volumes that happen,” he said.
The Cboe VIX Index also shows that price fluctuations tend to be frequent in the summer and early fall. August and September are historically the two worst months for the S&P 500 index.
Oil fell after a brief rally as traders reflected on the lack of relief for oil markets and the poor demand outlook. The dollar jumped to its highest level in a week.
Comments from Fed officials including Mary Daly, Loretta Mester, Charles Evans and James Bullard served to highlight a challenging backdrop of rising borrowing costs, price pressures and slowing economic growth.
San Francisco Fed President Daly said the Fed has “a long way to go” to achieve price stability around a 2% inflation target. Cleveland counterpart Mester said she wants to see “very compelling evidence” that monthly price increases are moderating.
St. Louis Fed President Bullard said in an interview with CNBC on Wednesday that there would have to be “convincing evidence” of a decline in inflation before policymakers could “feel like we’re doing enough.” .
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What to watch this week:
US Factory Orders, Durable Goods, ISM Services, Wednesday
BOE rate decision, Thursday
US Initial Jobless Claims, Trade, Thursday
Cleveland Fed President Loretta Mester will speak Thursday
US employment report for July, Friday
Some of the main movements in the markets:
The S&P 500 was up 1.2% at 11:44 a.m. New York time.
The Nasdaq 100 rose 2.2%
The Dow Jones Industrial Average rose 1.1%
The Stoxx Europe 600 rose 0.5%
MSCI World Index fell 0.8%
The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.2% to $1.0142
Sterling fell 0.4% to $1.2126.
The Japanese yen fell 0.8% to 134.24 per dollar
The 10-year Treasury bond yield advanced four basis points to 2.79%
Germany’s 10-year yield advanced six basis points to 0.88%
Britain’s 10-year yield advanced five basis points to 1.92%
West Texas Intermediate crude fell 2.1% to $92.45 a barrel.
Gold futures fell 0.9% to $1,773.20 an ounce.
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