U.S. stocks rose slightly after minutes from the Federal Reserve were released and investors started looking for insights into the state of the economy and the central bank’s efforts to tame inflation through interest-rate increases.
At 4 p.m. ET Wednesday, the S&P 500 was up 0.4%. The Nasdaq Composite Index also rose 0.4%. The Dow Jones Industrial Average picked up 0.2%, or about 70 points.
Fed officials concluded at their meeting last month that they needed to pick up the pace of interest-rate increases because of an increasingly worrying inflation outlook. Some investors believe that signals the Fed will stick with previously telegraphed plans to keep raising rates—and they worry that will tip the economy into a recession.
“When the Fed last met, the market’s primary worry was inflation; the minutes reflect that. But in the weeks since, the odds of a recession have picked up substantially,” said Michael Rosen, chief investment officer of Angeles Investments. “The challenge for monetary policy will become much more acute as the Fed is forced to balance elevated inflation with a contracting economy.”
Federal-funds futures recently priced in a roughly 50% chance of the benchmark interest rate rising to 3.5% by December before falling in mid-2023, as markets moderate their long-term expectations for interest rates, according to CME Group’s tracker.
“The market is pricing in a very benign scenario where the Fed can contain inflation with fairly modest tightening,” Mr. Rosen said. “That seems optimistic to me.”
Stocks had edged up in recent days, as some investors shifted their views about the aggressiveness of central bank tightening as economic growth and consumer sentiment weakened. Markets had begun to price in a pivot on policy from the Fed, despite inflation still being at a more than four-decade high.
“We are awaiting some kind of short-term rebound because the movement has been extremely quick from a historical point of view,” said Francesco Sandrini, head of multiasset strategies at
“But we are awaiting, as well, the second part of the correction, which is when the macroeconomic fears will feed through into earnings. This is a hard time for us as portfolio managers because we are between these two situations.”
A well-known recession indicator flashed in the bond market on Wednesday morning, as the U.S. yield curve inverted. That happens when shorter-dated yields such as for the two-year bond are higher than for longer-dated debt such as the 10-year.
The two-year Treasury yield rose to 2.961% Wednesday, while the 10-year gained to 2.911%. Yields rise as bond prices fall.
In morning data releases, hiring demand remained strong and the services sector unexpectedly maintained growth momentum.
“Over the last couple of days, markets priced out some of the hawkishness that they were expecting for the Fed. What’s going to be interesting is to see whether the Fed in the short term will try to push back,” Gergely Majoros, a portfolio adviser at Carmignac, said before the minutes were released.
The 10-year benchmark U.S. Treasury peaked at 3.482% just three weeks ago but has fallen since, as the growth outlook has weakened.
“I think we’ve seen the peak for the 10-year yield this cycle,” said
Tom Graff,
head of investments at Facet Wealth. “The risk versus reward at the longer-end of the curve is still pretty attractive.”
Oil prices moved lower after their biggest plunge since March on Tuesday. Global benchmark Brent crude was down 2% to $100.69 a barrel. The U.S. equivalent, WTI, fell 1% to $98.53 a barrel after falling below $100 the day before for the first time in about two months.
“When the growth outlook changes, people tend to anticipate that the demand side for energy will weaken as well and that tends to put pressure on the price of oil,” Mr. Majoros said.
Energy stocks fell 1.8% alongside crude oil prices, posting the largest losses among S&P 500 sectors in afternoon trading. In 4 p.m. trading,
was among the worst performers, down 3.4%.
Overseas, the pan-continental Stoxx Europe 600 rose 1.7%. The Norwegian government intervened to end an oil workers strike on Tuesday evening that threatened to more than halve the country’s gas exports, a key source of energy for the region.
Cryptocurrency exchange
declined 6.6% in 4 p.m. trading after a rival exchange put forward a proposal to regulators that would allow crypto investors to bypass brokers while trading derivatives. Instability in the digital-assets ecosystem was also on display after broker Voyager Digital Ltd. said that it has filed for bankruptcy protection, days after it suspended withdrawals and trading on its platform.
Stocks were mixed on Tuesday, with two of the three major indexes finishing in positive territory after a late-day rally.
Photo:
Michael Nagle/Bloomberg News
In Asia, most major benchmarks declined. The Shanghai Composite Index fell 1.4% and Hong Kong’s Hang Seng Index lost 1.2%. Japan’s Nikkei 225 also retreated 1.2%.
Corrections & Amplifications
Francesco Sandrini is head of multiasset strategies at Amundi. A previous version misspelled his first name as Francisco. (Corrected on July 6)
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Eric Wallerstein at eric.wallerstein@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
