Wall Street rallies for its best week since June on rate hopes

NEW YORK (AP) — Wall Street racked up more gains Friday on its massive one-day rally earlier to close out its best week since the summer.

The S&P 500 rose 0.9% daily after climbing 5.5% for its best day in more than two years. The Dow Jones Industrial Average added 32 points to its rise of over 1,200 from the previous day, while the Nasdaq composite jumped 1.9%.

Markets bounced back after China has relaxed some of its strict anti-COVID measures, which have hurt the world’s second-largest economy. Hopes of more growth from China helped not only stocks but also oil prices rise, with U.S. crude rising 2.9% to $88.96 a barrel.

The main reason for this week’s euphoria in the markets was a report released on Thursday showing inflation in the United States has slowed more than expected last month. This raised hopes that the worst of inflation may be over and that the Federal Reserve may be less aggressive in raising interest rates to bring it under control, although analysts have warned that high inflation could be slow to fall and some have called the big rally on Wall Street overdone.

What the Fed does with rates is crucial for Wall Street, as hikes slow the economy and can cause a recession, while driving down stock prices. They have been the main reason for market difficulties this year.

Perhaps just as important as the severity of current inflation is the level at which US households imagine it in the years to come. Indeed, expectations that are too high can trigger a vicious cycle in which people speed up their purchases and take other actions that further aggravate inflation.

The Fed said preventing such a catastrophic loop is one of the reasons it has acted so aggressively in rate hikes. Inflation expectations are currently high relative to history, but a preliminary report on Friday suggested they are not moving much.

Median inflation expectations for the coming year among households rose to 5.1% from 5% a month earlier, according to a survey by the University of Michigan. Long-term inflation expectations, meanwhile, reached 3%. But it’s still in the same 2.9% to 3.1% range they’ve been in for 15 of the past 16 months.

High inflation helped send the general consumer sentiment survey reading falling more than economists expected.

“The consumer is focused on inflation and they feel it every day,” said Brian Price, head of investment management at Commonwealth Financial Network. “I wouldn’t expect us to see a rise in consumer confidence until inflation is under control.”

The Fed has already raised its key overnight rate to a range of 3.75% to 4%, from virtually zero in March. The likely scenario is still for it to rise further next year and then keep rates at that high level for some time.

The hope for the markets is that a slowdown in inflation could mean the Fed keeps the line lower and less painful for investors than it otherwise would have.

“They’ve been pretty clear from the start that they’re going to accelerate interest rate hikes,” Price said. “They need time to assess the data over the next few months.”

Traders are increasingly betting that the federal funds rate could hit a range of 4.75% to 5% early next year, according to CME Group. A week ago they saw a higher ultimate rate as more likely, with a large share expecting something like 5.25% to 5.50%.

Bond markets were closed to trading on Veterans Day. On Thursday, yields plunged as investors lowered their expectations of how aggressively the Fed will raise rates.

The S&P 500 rose 36.56 points to 3,992.93, and its 5.9% gain for the week was its third of the past four and its biggest since June. The Dow rose 32.49, or 0.1%, to 33,747.86, and the Nasdaq climbed 209.18, or 1.9%, to 11,323.33. Both also posted strong gains for the week.

The market has regularly reacted with exaggerated swings after the monthly inflation data report, according to Jonathan Golub, chief US equity strategist at Credit Suisse. And while Thursday’s report “was clearly a big positive, the market response seems out of step with the size of the surprise.”

Companies doing a lot of business in China and the region were particularly strong on Friday after the easing of anti-COVID restrictions. Wynn Resorts rose 8.3% and Las Vegas Sands gained 5.5%.

Tapestry rose 8.7% and Ralph Lauren 9.4% to also help lead the S&P 500 higher. Both companies reported higher-than-expected earnings for the latest quarter.

On the losing side are healthcare companies. Elevance Health fell 5.8% and Cigna 6%.

Meanwhile, in the crypto market, prices have fallen again amid the industry’s latest crisis of confidence. One of the largest trading platforms, FTX, filed for bankruptcy protection after its users began scrambling to withdraw their money over fears of its financial strength and after a bigger rival canceled a deal to buy the struggling company.

The exchange and its founder are under investigation by the Department of Justice and the Securities and Exchange Commission, and rivals have said that FTX’s failure could shake confidence in the wider industry.

Bitcoin fell below $16,800, down 6% from the previous day, according to CoinDesk. It set its record close to $69,000 almost exactly a year ago, and it was above $21,000 a week ago.

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AP Business Writers Damian J. Troise, Joe McDonald and Matt Ott contributed.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

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