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Dow books 4th day of gains, stocks rally after Fed minutes signal flexibility on interest rate hikes

MarketWatch logo MarketWatch 5/25/2022 Joy Wiltermuth
© olivier douliery/Agence France-Presse/Getty Images
MARKET SNAPSHOT

Stocks closed higher Wednesday as investors took away a message of flexibility from the release of minutes of the early May Federal Reserve meeting about its path to higher interest rates.

How did stocks trade?
  • The Dow Jones Industrial Average DJIA rose 191.66 points, or 0.6%, ending at 32,120.28.
  • The S&P 500 SPX gained 37.25 points, or 1% finishing at 3,978.73.
  • The Nasdaq Composite COMP advanced 170.29 points, or 1.5% closing at 11,434.74.
  • It was the Dow’s biggest 4-day win streak, at 2.8%, in about a month, according to Dow Jones Market Data.

Video: Concerns over economy grow as stocks plunge 1,000 points (TODAY)

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On Tuesday, the Dow industrials rose 0.2% to 31,928.62, its third straight gain. The S&P 500 fell 0.8%, snapping two straight days of gains, while the Nasdaq Composite slumped 2.4% to 11,264.45, its lowest close since Nov. 3, 2020.

What drove the markets?

Stocks closed higher after the Federal Reserve released minutes of its early May meeting, which signaled the central bank remains open to rethinking aggressive plans to raise rates to tame high inflation.

Minutes from the May meeting showed support for half-point moves by the Fed as it seeks to get its policy rate “expeditiously toward neutral,” over the next couple of meetings and that high inflation remains a key focus.

“The one thing this Fed is very good at is being measured,” said Eric Merlis, managing director of global markets at Citizens, by phone. “I chose to see this as a recognition that they’re not going to go headlong along a path,” he said. “They recognize things could change.”

Concerns have been mounting about the potential for the Fed to tighten financial conditions too sharply and damage the economy, particularly with businesses and households already facing the sharpest price pressures in decades.

The fear is economic growth will slow quickly, with the war in Ukraine and China’s COVID lockdowns worsening the outlook. 

U.S. benchmark stock indexes have suffered this month after grim earnings outlooks from several major retailers. More reports this week could help inform how other companies are handling inflationary pressures. Snowflake and Nvidia are set to post quarterly reports after the bell Wednesday. Costco will report on Thursday.

“I think the market has put in a bottom,” said Peter Cardillo, chief market economist at Spartan Capital Securities, by phone.

The S&P 500’s recent testing of the 3,850 level, but then finding higher ground, helped inform his rationale. Cardillo also said investors have been “through the discounting process of high inflation,” aggressive tightening of financial conditions by the Fed and the probability of a recession.

Read: S&P 500 hovers near bear market. Its ferocity may depend on the economy.

Fed Chairman Jerome Powell earlier laid plans for the central bank to boost the benchmark interest rate by half-a-percentage point at the next two FOMC meetings in June and July, bringing it to near 2% by August.

After that, Bill Adams, chief economist for Comerica Bank, said he expects the Fed to make a series of quarter-percentage-point rate hikes at the September, November and December meetings, raising the fed funds to a 2.5% to 2.75% target range at year-end.

Read: Fed’s Bostic calls for caution as Fed raises rates: ‘Even firetrucks with sirens blaring slow down at intersections’

The minutes also focused on potential outright sales of the central bank’s mortgage bondholdings as it looks to reduce its near $9 trillion balance sheet. Adams at Comerica said he expects those to start in September, in written commentary.

On the economic front, an outlook Wednesday from the Congressional Budget Office pointed to high inflation that persists into next year. In data, orders at U.S. factories for long-lasting goods such as machinery and electronics rose 0.4% in April, signaling the economy was still growing at a steady pace in the early spring. Economists polled by The Wall Street Journal had forecast a 0.7% increase.

Which companies were in focus?
  • Shares of Dick’s Sporting Goods Inc.  soared 9.7% Wednesday, after the sporting goods and apparel retailer reported fiscal first-quarter results that beat expectations.
  • Express Inc. shares   jumped 6.7% Wednesday, after the clothing retailer posted a narrower-than-expected loss for the first quarter and offered guidance that was above consensus. 
  • Wendy’s rallied 9.8% after longtime shareholder Trian Fund Management said it was exploring an acquisition or other potential deal for the restaurant chain. Trian is the company’s largest shareholder, with a 19.4% stake.
  • Kohl’s Corp. shares gained 11.9% on Wednesday after Reuters reported that bidders continue to circle the retailer at lower prices than earlier this year, but still well above recent trading levels of the stock.
  • Nordstrom surged 14% after the retailer raised its annual sales and profit forecast late Tuesday.
How did other assets trade?
  • The yield on the 10-year Treasury note fell 1.2 basis points to 2.746%, as investors sought safety in government debt. Yields and Treasury prices move opposite each other.
  • The ICE Dollar Index   which measures the greenback against major currencies, was up 0.3%.
  • In oil futures  West Texas Intermediate crude for July delivery   gained 0.5% to settle at $110.33 a barrel. Gold for June delivery  dropped 1% to close at $1,846.30 an ounce.
  • Bitcoin   was up 1% nearly $29,600.
  • In European equities, the Stoxx Europe 600  closed up 0.6%, while London’s FTSE 100  edged 0.5% higher.
  • In Asia, the Shanghai Composite  finished 1.2% higher, while Hong Kong’s Hang Seng Index  gained 0.3% and Japan’s Nikkei 225 index   dropped 0.3%.

-Barbara Kollmeyer contributed reporting to this article.

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