U.S. stocks rise as Treasury yields fall on hopes of end to Fed rate hikes

What’s driving 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 reduced 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. Bostic, speaking at a panel, is the first of four Fed speakers Tuesday.

Later in the day, Neel Kashkari, president of the Minneapolis Fed, appears in Minot, North Dakota at 3 p.m. and Mary Daly, president of the San Francisco Fed, appears 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 15 basis points to 4.681% on Tuesday.

Bostic’s comments are helping the market maintain its upward momentum Tuesday, said Sonu Varghese, global macro strategist and vice president at Carson Group.

Even amid geopolitical uncertainty, Monday’s higher close is instructive for Tuesday’s trading dynamics and the coming days, Varghese noted. “The main driver remains the Fed and it was reminder to everyone that remains the case,” he said.

Others said it’s still all about the Fed. “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,” said Richard Hunter, head of markets at Interactive Investor.

Traders on Tuesday were pricing in an 88% 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 12%, 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,
  +1.87%
  rose almost 2% Tuesday, after the beverage and snack giant reported third-quarter earnings that topped consensus and raised its full-year guidance.

• Palantir Technologies
  PLTR,
  +1.35%
  rose 1.5% on news 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,
  +5.38%
  shares are 4.3% higher Tuesday after a buy rating from analysts at UBS. Production and other fundamentals “look brighter” for the electric vehicle maker, analyts said.

— Jamie Chisholm contributed.