Wall Street moved higher on Wednesday as a wave of U.S. economic data reduced expectations for another Federal Reserve interest rate hike in October.
Interest-rate-sensitive sectors led the advance, particularly technology and communication services. However, U.S. Treasury yields remained elevated as oil prices moved higher.
At 12:41 ET, the S&P 500 gained 0.5% to 7,711.46 points.
The Nasdaq Composite climbed 1% to 27,063.60 points, while the Dow Jones Industrial Average slipped 0.1% to 51,297.09 points.
U.S. Economic Data Supports Stocks
Wednesday’s busy economic calendar dominated market attention.
Investors focused especially on the latest Personal Consumption Expenditures inflation data, which is closely watched by the Federal Reserve.
Headline PCE inflation rose 0.3% month-on-month in August and 3.4% year-on-year.
That was below forecasts of 0.4% and 3.7%, respectively.
In July, headline PCE had increased 0.1% month-on-month and 3.4% on an annual basis.
Core PCE Inflation Also Comes in Cooler
Core PCE inflation, which excludes food and energy prices, also came in below expectations.
The index rose 0.2% month-on-month and 3.0% year-on-year in August.
Economists had expected increases of 0.3% and 3.3%.
The softer inflation readings helped reduce concerns that the Federal Reserve would need to raise interest rates again immediately.
U.S. GDP Growth Revised Higher
The economic data also showed stronger-than-expected growth.
The Bureau of Economic Analysis revised second-quarter U.S. real GDP growth higher to 2.2%.
The previous estimate had placed growth at 1.5%.
Economists had also expected the reading to remain at 1.5%.
The upward revision added to evidence that the U.S. economy remains resilient despite elevated borrowing costs.
Private-Sector Hiring Improves
Labor-market data also surprised to the upside.
ADP reported that private employers added 90,000 jobs in September.
That was a sharp improvement from the 36,000 jobs created in August.
It also marked the first acceleration in hiring since May.
The combination of stronger growth, improving employment and softer inflation gave investors a more favorable economic backdrop.
Fed Rate-Hike Expectations Decline
The Federal Reserve raised interest rates earlier this month for the first time in more than three years.
Officials also signaled that additional tightening could still be needed.
Expectations for another October rate hike had increased after the September meeting as policymakers maintained a hawkish tone.
A sharp sell-off in the bond market had also added to concerns that interest rates could remain higher for longer.
However, those expectations began to ease after New York Fed President John Williams said there was no urgent need to raise rates again.
Wednesday’s softer inflation data pushed those expectations even lower.
According to the CME FedWatch tool, the probability of a 25-basis-point rate hike in October fell to around 39%, down from almost 51% the previous day.
Investors See Signs of a Soft Landing
Fifth Third Wealth Advisors Chief Investment Officer Chris Osmond said the combination of stronger economic growth, softer inflation and a resilient labor market creates a favorable environment for equities.
Such conditions support the possibility of a soft landing, where inflation cools without triggering a major economic downturn.
Lower expectations for further rate hikes also benefit growth-oriented stocks.
Technology companies, AI-related shares and small-cap stocks can gain when interest-rate expectations fall because lower rates reduce the discount applied to future earnings.
Strong consumer spending can also support revenue growth across several sectors.
Treasury Yields Remain Near Multi-Decade Highs
The latest data initially provided some relief to the U.S. bond market.
Shorter-term Treasury yields declined as traders reduced bets on an October rate hike.
The two-year Treasury yield, which is highly sensitive to monetary policy expectations, recorded one of the largest moves.
However, longer-term yields later resumed their climb.
The benchmark 10-year Treasury yield remained near its highest level since April 2002.
Meanwhile, the 30-year yield traded close to its highest level since June 2002.
Bond markets have come under heavy pressure due to several factors, including inflation concerns linked to oil prices, large debt issuance, hawkish Federal Reserve signals and growing U.S. fiscal deficits.
Investors have also been monitoring the amount of corporate debt being issued to finance artificial intelligence infrastructure projects.
Micron Earnings Take Center Stage
Away from macroeconomic data, investors were also preparing for quarterly results from Micron Technology.
The memory-chip producer was scheduled to report fiscal fourth-quarter earnings after the closing bell.
Markets expected significant year-on-year growth in both earnings and revenue.
Investors were also focused on Micron’s outlook for the coming quarters and any comments about AI-driven demand for memory chips.
Micron is one of the world’s largest memory-chip producers alongside Samsung Electronics and SK Hynix.
Because of its position in the industry, the company is often viewed as an important indicator of broader semiconductor demand.
Oil Prices Rebound
Oil prices also moved higher on Wednesday after falling sharply in the previous session.
Investors weighed signs that Middle East oil exports were recovering against continuing concerns over disruptions to shipments through the Strait of Hormuz.
Higher oil prices remain important for the inflation outlook because they can increase transportation and production costs.
That could complicate the Federal Reserve’s efforts to bring inflation lower.
S&P 500 and Nasdaq Benefit From Softer Fed Expectations
The latest data provided investors with a relatively favorable combination of stronger growth, improving employment and cooler inflation.
That helped the S&P 500 and Nasdaq move higher as traders reduced expectations for an immediate Federal Reserve rate hike.
However, elevated Treasury yields and oil prices remain key risks for markets.
Investors will continue watching inflation, employment, bond yields and corporate earnings for further clues about the direction of U.S. stocks and Federal Reserve policy.
