Nasdaq rises as softer inflation eases October Fed hike bets

US stocks finished Wednesday on uneven footing after new inflation data reduced expectations of another Federal Reserve interest-rate increase in October. The Nasdaq Composite rose 0.24 per cent, while the S&P 500 slipped 0.25 per cent and the Dow Jones Industrial Average fell 0.86 per cent.

The moves came as the Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, showed prices rising 3.4 per cent in August from a year earlier. Economists surveyed by Reuters had expected a 3.7 per cent increase.

Investors initially reacted positively to the cooler reading. The S&P 500 was up as much as 0.7 per cent during the session, while the Nasdaq advanced as much as 1.2 per cent. Gains faded towards the close as the two-year Treasury yield moved slightly higher, reflecting renewed sensitivity to the Fed’s interest-rate outlook.

The figures were reported by The Business Times, which said market-implied odds of at least a quarter-point Fed increase at the October meeting fell to about 37 per cent. That compared with roughly 51 per cent in the previous session and almost 71 per cent a week earlier, according to CME’s FedWatch Tool.

Inflation cools, but rate risks remain

The inflation report offered some relief to markets, although analysts said changes to the Bureau of Economic Analysis method for calculating the PCE index also helped produce the lower result. The reading therefore did not eliminate concerns about persistent price pressures.

Crude oil prices have risen amid the US-Iran war, while exceptionally high diesel costs have added to inflation anxiety. Those pressures have contributed to higher Treasury yields. Fed officials have also signalled that additional increases could still be necessary if inflation fails to moderate after the central bank lifted rates by 25 basis points this month.

Fed Governor Lisa Cook said she remained committed to reducing inflation while protecting the labour market, though she did not directly address the latest PCE result. The two-year Treasury yield is closely watched because it tends to reflect expectations for near-term monetary policy. Longer-term yields continued to rise on the view that economic growth would remain firm.

The latest revision to second-quarter economic data supported that view. Gross domestic product was revised to an annualised growth rate of 2.2 per cent, with consumer expenditure and investment in artificial-intelligence infrastructure helping to sustain activity.

Anthony Saglimbene, chief market strategist at Ameriprise Financial, said markets had so far been willing to look beyond higher borrowing costs when economic growth and corporate profits remained strong. He also warned that prolonged elevated rates could hurt bond portfolios, restrict credit and eventually weigh on economic expansion and company earnings.

Quarterly gains continue

Despite Wednesday’s retreat in the S&P 500, both that index and the Nasdaq recorded their second consecutive quarterly advances. Each has now risen in five of the past six quarters. The Dow, by contrast, posted its second quarterly decline in three quarters.

The monthly picture was less uniform. The S&P 500 dropped 0.45 per cent in September, marking its third monthly decline in four months. The Nasdaq gained 1.86 per cent for its second consecutive monthly increase, while the Dow lost 4.29 per cent and ended a five-month run of monthly gains.

At the close, the Dow was down 443.87 points at 50,906.05. The S&P 500 fell 19.30 points to 7,651.54, while the Nasdaq added 63.52 points to 26,861.06.

Technology shares provided support. Microsoft, Apple and Nvidia all moved higher, helping the S&P 500 technology sector gain 0.6 per cent and become the strongest-performing sector of the day. Even so, nine of the index’s 11 main sectors finished lower.

Jobs data adds to the picture

A separate employment report offered another indication that the US economy was continuing to expand. Private employers added 90,000 jobs during the month, following a downwardly revised increase of 36,000 in August, according to the ADP National Employment Report.

The report was one of several labour-market indicators released during the week. Investors were awaiting Friday’s government payrolls figures for a broader assessment of employment conditions and the potential implications for Fed policy.

Company-specific trading also influenced the session. Hewlett Packard Enterprise gained 3.9 per cent after lifting its long-term revenue-growth forecast for its networking operation and announcing a US$1.2 billion agreement with Vultr. Moderna declined 5.3 per cent after Citigroup cut its rating on the biotech company to sell from neutral.

Declining shares outnumbered advancing issues by 1.66 to one on the New York Stock Exchange and by 1.51 to one on the Nasdaq. The S&P 500 registered 11 new 52-week highs and 24 new lows, while the Nasdaq recorded 54 new highs against 212 new lows. Trading volume reached 18.13 billion shares, above the 17.06 billion average for the previous 20 full sessions.