U.S. stocks post third day of gains as Treasury yields fall and hopes rise for end to Fed rate hikes

What drove markets

Tuesday’s leg higher in stocks came as anxiety over violence in the Middle East was counteracted by comments from Federal Reserve officials suggesting a recent tightening of credit conditions may reduce the need for another interest rate hike by the central bank.

On Tuesday morning, Raphael Bostic, president of the Atlanta Fed, added to the view, saying he doesn’t think any more interest rate increases are needed.

Meanwhile, Minneapolis Federal Reserve President Neel Kashkari on Tuesday said the recent runup in U.S. long-term bond yields is puzzling. Mary Daly, president of the San Francisco Fed, will also speak Tuesday at a town hall event at 6 p.m.

Bostic and the rest of Tuesday’s speakers follow Fed Vice Chair Philip Jefferson, who said on Monday the central bank could “proceed carefully” following the recent surge in Treasury yields. The same day, Fed Bank of Dallas President Lorie Logan said the surge in long-term yields may mean less need for additional increases in borrowing costs.

“US stocks are rallying after a steady dose of dovish Fed speak has traders convinced rate hikes are over,” Edward Moya, senior market analysts at Oanda wrote in a Tuesday note. “Also providing a boost to sentiment is the report that China is considering more support for the economy, potentially raising its budget deficit this year.

“Last week was all about an intensifying bond market selloff but that seems to be over following the surprise attack by Hamas on Israel,” he added. “A long-lasting bond market rally seems unlikely given major structural shifts of higher bond supply and on uncertainty with demand.”

The 10-year Treasury BX:TMUBMUSD10Y, which was not trading Monday because of a U.S. national holiday, saw its yield dive 12.9 basis points to 4.654% on Tuesday.

Bostic’s comments helped the stock market maintain its upward momentum Tuesday, said Sonu Varghese, global macro strategist and vice president at Carson Group. “The main driver remains the Fed, and it was a reminder to everyone that remains the case,” Varghese said.

Richard Hunter, head of markets at Interactive Investor, echoed the point. “Even with the evolving situation in the Middle East, investors remained focused on the Fed’s current thinking on interest rates and the need to contain inflation,” Hunter said.

Traders on Tuesday were pricing in an 86% chance that the Fed will leave its policy interest rates unchanged after its November meeting, according to the CME FedWatch Tool. The chances of a 25 basis point rise in December came to 14%, down from 28% just a week ago.

But there is plenty of economic data and Fed official commentary to digest before then. Particularly important will be the producer and consumer inflation numbers for September, released on Wednesday and Thursday this week respectively. Third quarter earnings season also kicks off this week with major bank earnings Friday.

“Equity markets have been underpinned by a reprieve in yields and crude oil prices,” said Quincy Krosby, LPL Financial’s chief global strategist. “Financial markets  are keenly focused on the release of key inflation-related data this week and Friday’s ‘official’ opening of the earnings season, while simultaneously monitoring events in the Middle East.”

Tuesday had its own batch of U.S. economic data. August wholesale inventories dropped 0.1%, matching forecasts. The numbers mark the sixth straight decline month to month. Meanwhile, consumers’ inflation expectations for the near- and midterm were mostly steady, according to the Federal Reserve Bank of New York’s monthly survey of consumer expectations.

Companies in focus

• PepsiCo Inc. 
  PEP,
  +1.88%
  closed up 1.9% Tuesday, after the beverage and snack giant reported third-quarter earnings that topped consensus and raised its full-year guidance.

• Palantir Technologies
  PLTR,
  +1.08%
  rose 1.1% on news that the data analytics company was awarded a $250 million contract to test and develop artificial intelligence and machine learning by the U.S. Army.

• Rivian Automotive Inc.
  RIVN,
  +4.58%
  shares ended 4.6% higher Tuesday after a buy rating from analysts at UBS. Production and other fundamentals “look brighter” for the electric vehicle maker, analysts said.

— Jamie Chisholm contributed.