Wall Street is experiencing a slight uptick as reports suggest that the U.S. economy may be cooling, leading to potentially lower inflation. The S&P 500 is up 0.4% in afternoon trading, rebounding from a 1.4% decline that pushed it to its lowest level in four months. The Dow Jones Industrial Average is up 8 points, while the Nasdaq composite is up 0.9%.
Stocks have faced challenges since the summer due to rising Treasury yields in the bond market. These high yields have diverted investment dollars away from stocks and toward bonds. Additionally, they have increased borrowing costs for corporations, impacting their profitability.
However, there is some relief as the yield on the 10-year Treasury, a key gauge of the bond market, has pulled back from its highest level since 2007. This has been accompanied by a slight easing in shorter- and longer-term yields, providing a slight boost to the stock market.
The recent reports on the economy have played a role in these yield movements. The first report indicated weaker-than-expected hiring by non-government employers last month. This has raised hopes of a cooling job market, which would alleviate upward pressure on inflation. A more modest job market could also influence the Federal Reserve to adopt a more relaxed approach to interest rates.
The Fed has already increased its main interest rate to the highest level since 2001, and it has suggested that it may maintain a higher overnight rate next year compared to previous expectations. This has contributed to the surge in Treasury yields as traders adjust to a new normal of higher rates for a longer period.
The job market is of particular interest to the Fed because excessive strength in this area could result in significant wage increases for workers. This, in turn, could drive inflation well above the Fed’s target of 2%.
A report from ADP, a payroll services company, suggested that private employers added 89,000 jobs last month, a significant slowdown compared to the expected 140,000. Though this report has limitations in predicting the more comprehensive government jobs report set to be released on Friday, if it also indicates a cooling labor market, investors may breathe a sigh of relief regarding potential interest rate hikes.
Another report on the economy highlighted a slight slowdown in growth for businesses in the U.S. services industry. This was accompanied by an increase in prices paid by services companies, possibly indicating persistent inflationary pressures.
In addition to these economic factors, falling oil prices have also contributed to easing inflation concerns. Benchmark U.S. crude fell 4.5% to $85.20 per barrel, after reaching a peak of $93 last week. This downward trend comes after announcements of production cuts by some oil-producing nations pushed crude prices higher from $70 during the summer.
Wall Street is also dealing with the dismissal of Kevin McCarthy as the speaker of the House of Representatives, although this is not expected to have a significant immediate impact. However, economists at Goldman Sachs warn that a leadership vacuum in the House could increase the chances of a government shutdown when the current funding extension expires. This could negatively impact the U.S. economy and raise the risk of a recession.
On Wall Street, Big Tech stocks are providing support to the market after leading it lower the previous day. High-growth stocks, including Microsoft, Tesla, and Alphabet, are more sensitive to interest rate expectations and have seen gains. Conversely, oil and gas companies have seen declines due to the falling price of crude, with Exxon Mobil, Chevron, and ConocoPhillips all experiencing losses.
Sources:
– ADP
– Goldman Sachs