Dow ekes out gain, but stocks mostly fall after Fed survey shows economy slowed

What drove markets

Stocks turned lower late Wednesday after the Fed’s “Beige Book” survey of its districts showed mostly weaker economic activity and easing demand for labor from a month ago.

“Obviously a more somber report than the GDP numbers we saw this morning,” said Alex McGrath, chief investment officer for NorthEnd Private Wealth, in emailed comments.

McGrath said the Fed survey raised the possibility that “we have already entered a mild recession that many have been predicting for a year.”

Stocks rallied earlier in the session after U.S. data showed the economy grew at a 5.2% seasonally adjusted annual rate in the third quarter. The reading came in above expectations of 5% and above the previous estimate of 4.9%.

Despite the mixed economic data, the main U.S. equity gauges still were on pace for their best monthly gains of the year, helped by a sharp pullback in benchmark borrowing rates for the economy.

The yield on the 10-year Treasury
BX:TMUBMUSD10Y,
which in October hit a 16-year peak just above 5%, slid to 4.27% Wednesday as investors boosted bets that easing inflation will encourage the Fed to stop raising policy rates and even trim rates within several months.

“I don’t think they’ll cut in March,” said Sonu Varghese, global macro strategist at Carson Group. “But right now the market is being bullish on rate cuts sooner than later.”

The odds of a Fed rate cut of 25 basis points was priced at 46.2% Wednesday, up from just 21% in the previous session. The chance of at least a 25-basis-point rate cut by May was near 76%, according to the CME FedWatch tool.

The shift follows comments on Tuesday from Fed Governor Chris Waller, who suggested current monetary policy is well-positioned to slow the economy and cool the inflation.

Atlanta Fed President Raphael Bostic said Wednesday that he is more confident in his forecast of a soft landing for the economy and the inflation keeps falling back to 2%. Chair Jerome Powell is due to give a speech at 11 a.m. Eastern on Friday.

In other economic data, households boosted spending at a 3.6% pace in the third quarter, down from an original 4%, while the price index for personal-consumption expenditures (PCE) was revised down to a 2.8% annualized increase from 2.9% in the prior release, economists said.

“When people are working, people can spend,” Jamie Cox, managing partner for Harris Financial Group, told MarketWatch.

Cox expects higher interest rates to eventually weaken consumption and lead to rate cuts next year, but sees healthy signs in economic growth against a backdrop where rates no longer are being kept at ultralow levels.

“If you still get GPD growth and rates are way above 3%, then that’s good,” Cox said.

The U.S. trade deficit in goods also widened to $89.8 billion in October, the Commerce Department said Wednesday. An advanced estimate of wholesale inventories, meanwhile, showed a 0.2% drop in October.

Key inflation data, in the shape of the PCE index for October, will be published Thursday at 8:30 a.m. Eastern.

Read: PCE inflation report could show a cooling down. Does that mean the Fed is done raising rates?

The dollar index
DXY
was down 3.6% on the month so far, helping to boost the price of gold
GC00,
-1.25%,
which is above the $2,000-an-ounce mark.

Still, the odds of the U.S. achieving a soft landing remained a topic of debate. JPMorgan Chase & Co.
JPM,
+1.10%
Chief Executive Jamie Dimon said Wednesday he’s less certain than others that a U.S. recession can be avoided.

See: Bill Ackman warns economy will fall off a cliff if the Fed doesn’t hurry and cut rates

Companies in focus

• General Motors Co.’s
  GM,
  +0.72%
  stock gained 9.4% on Wednesday after the carmaker unveiled plans to reward its shareholders generously now that labor strikes are out of the way.

• Shares of Petco Health & Wellness Co. Inc. 
  WOOF,
  -3.20%
  tumbled 28.9% Wednesday after the pet care-products retailer reported a surprise fiscal third-quarter loss and slashed its full-year outlook.

• Shares of Foot Locker Inc.
  FL,
  -0.56%
  jumped 16.1% after the athletic-footwear retailer recorded a clean-sweep earnings beat and provided an upbeat sales outlook.

• GameStop Corp.
  GME,
  -4.95%
  shares rose 20.5% on Wednesday after individual investors were piling into long-shot call options for the videogame retailer, reigniting a rally in its shares.

—Jamie Chisholm contributed reporting to this article.