The Nasdaq finished higher Wednesday while the S&P 500 and Dow declined as cooler-than-expected inflation eased expectations for another Federal Reserve rate increase in October, even as stronger economic growth and hiring kept Treasury yields elevated.
By yourNEWS Media Newsroom
U.S. stocks ended the third quarter on a mixed note Wednesday as a softer-than-expected inflation report reduced expectations for another Federal Reserve interest-rate increase in October, while stronger economic growth and hiring data underscored the resilience of the economy.
The Nasdaq Composite gained 0.25% in preliminary closing data, while the S&P 500 slipped 0.23% and the Dow Jones Industrial Average fell 0.84%.
The Nasdaq and S&P 500 nevertheless recorded their second consecutive quarterly gains and their fifth advances in the past six quarters. The Dow posted its second quarterly decline in three.
Investors focused heavily on the Commerce Department’s latest Personal Consumption Expenditures Price Index, the inflation gauge closely watched by the Federal Reserve.
The PCE price index increased 3.4% from a year earlier in August, below the 3.7% forecast among economists surveyed by Reuters and down from the previously reported 3.7% annual pace in July.
The softer reading immediately reduced expectations that Fed policymakers will raise interest rates again at their October meeting.
Futures markets showed the probability of a rate increase of at least 25 basis points falling to roughly 39% Wednesday, compared with about 51% a day earlier and nearly 71% one week ago.
The shift followed the Fed’s decision earlier this month to raise its benchmark interest rate by a quarter percentage point as policymakers sought to contain renewed inflation pressures.
Higher crude oil prices stemming from the U.S.-Iran war and sharply elevated diesel costs have fueled concern that inflation could remain persistent, helping push Treasury yields higher in recent weeks.
Several Fed officials have indicated that further rate increases could be necessary if inflation fails to moderate.
Wednesday’s PCE report provided some evidence that those pressures may be cooling, although analysts also noted that methodology changes by the Bureau of Economic Analysis contributed to the lower inflation reading.
The inflation data initially pushed the yield on the two-year Treasury note lower. That yield, which tends to respond closely to changes in expectations for Fed policy, later reversed course and moved slightly higher.
Longer-term Treasury yields continued rising as investors weighed the prospect of stronger economic growth against the possibility that interest rates will remain elevated for an extended period.
Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, said investors have so far remained willing to tolerate higher borrowing costs as long as economic growth and corporate profits remain strong.
“What the market is focused on is, is the economy continuing to grow and can it manage those higher interest rates? And I would say so far, the market has looked kind of like history that when the economy is growing, when profits are strong, when there’s a secular theme, it will look past higher interest rates,” Saglimbene said.
He cautioned, however, that investors could react quickly if high interest rates begin restricting credit or weakening corporate profits.
“However… if these higher rates stay at these elevated levels for longer, it’s likely to start doing potentially more damage to the bond side of the portfolio, it could limit credit or available credit. And if investors start to feel those conditions could weigh on economic growth or weigh on corporate profitability over the next quarter or two, then I think you would see a very swift negative reaction in the market.”
The inflation report arrived alongside substantially stronger economic growth figures.
The Commerce Department revised second-quarter gross domestic product upward to a 2.2% annualized growth rate, compared with its previous estimate of 1.5%.
Consumer spending and business investment helped drive the revision, including substantial spending connected with the continuing construction of artificial intelligence infrastructure.
Consumer activity has remained a key support for the economy despite elevated borrowing costs and higher prices for energy and other necessities.
Business investment in technology and equipment has also benefited from the rapid expansion of data centers and other infrastructure needed for artificial intelligence.
The combination of cooler inflation and stronger growth produced competing forces for financial markets.
Lower inflation reduces pressure on the Fed to raise borrowing costs, generally supporting stocks.
Faster economic growth, however, can keep inflationary pressures alive and push bond yields upward if investors believe the central bank will need to maintain restrictive monetary policy for longer.
Nasdaq and S&P Finish Quarter Higher
According to preliminary market data, the S&P 500 fell 18.13 points, or 0.23%, Wednesday to 7,652.71.
The Nasdaq Composite gained 66.46 points, or 0.25%, to 26,864.00.
The Dow Jones Industrial Average dropped 431.84 points, or 0.84%, to 50,918.08.
Technology stocks provided much of the market’s support.
Amazon, Apple and Nvidia each advanced, helping make information technology the strongest-performing S&P 500 sector of the session.
The strength in large technology companies prevented broader declines from pulling the major indexes substantially lower.
The quarter continued a pattern in which enthusiasm surrounding artificial intelligence, strong corporate earnings and investment in technology infrastructure has supported major stock indexes despite high interest rates and geopolitical uncertainty.
The S&P 500 and Nasdaq both completed their second consecutive quarterly gains Wednesday and have now advanced in five of the past six quarters.
The Dow, by contrast, registered a quarterly decline for the second time in three quarters.
Markets have had to absorb sharply higher oil prices during the period as the war involving the United States and Iran disrupted energy markets and shipping through the Middle East.
Those higher energy prices have complicated the Federal Reserve’s inflation fight and contributed to rising yields in the Treasury market.
Private Employers Add 90,000 Jobs
Investors also received fresh evidence Wednesday that private-sector hiring strengthened in September.
Private employers added 90,000 jobs during the month, according to the ADP National Employment Report.
August’s increase was revised downward to 36,000 jobs.
The September figure exceeded economists’ expectations and provided another indication that the labor market continues to expand despite higher interest rates and economic uncertainty.
The ADP report precedes Friday’s more closely watched federal employment report, which will provide figures for total nonfarm payrolls and the unemployment rate.
The labor market is particularly important for the Federal Reserve because policymakers are attempting to reduce inflation without causing a significant deterioration in employment.
Strong hiring gives the central bank more room to keep rates elevated or increase them again if inflation remains too high.
At the same time, a sharp weakening in employment could make additional tightening more difficult.
Federal Reserve Governor Lisa Cook said Wednesday that she remains committed to bringing inflation under control while avoiding unnecessary damage to the labor market.
Cook did not directly address the newly released PCE figures but said price pressures have remained too high for too long.
The combination of Wednesday’s economic reports left investors with evidence that inflation had moderated more than expected while economic activity and employment remained comparatively strong.
That balance helped reduce immediate expectations for another Fed move in October without eliminating the possibility of additional tightening later this year.
Several individual stocks also made large moves Wednesday.
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