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Market Snapshot: Dow, S&P 500 aim for best day in 2 months as Fed’s Powell says tapering of bond purchases could be announced next month

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U.S. stock indexes on Wednesday rose toward their best day in two months, after the Federal Reserve Chairman Jerome Powell signaled the central bank may announce a pullback of its bond purchases in November and could start to raise interest rates in 2022, with both moves largely expected by market participants.

Investor concerns about financial contagion from a potential default by China’s giant property company Evergrande have somewhat abated, but investors are also watching developments in the U.S. Congress on raising the federal debt ceiling.

How are stock indexes trading?
  • The Dow Jones Industrial Average
    DJIA,
    +1.00%

    climbed 416 points, or 1.2%, to 34,328.
  • The S&P 500 index
    SPX,
    +0.95%

    rose by about 50 points, or 1.1%, to around 4,404.
  • The Nasdaq Composite Index
    COMP,
    +1.02%

    advanced 173 points, or 1.2%, to reach about 14,918.

On Tuesday, the Dow fell 51 points, or 0.15%, to 33,920, the S&P 500 declined 0.08% to 4,354, and the Nasdaq Composite gained 32 points, or 0.22%, to 14,746. The Dow and S&P 500 marked a fourth straight day of losses, which was the worst stretch for the S&P 500 since mid-May.

What’s driving the market?

Wall Street cheered Wednesday’s Federal Reserve decision to keep its massive bond-buying program and ultralow interest-rate regime in full swing to support financial markets and the economy through the pandemic — for now.

But stocks trimmed some of its gains after Fed Chairman Powell said plans to taper the central bank’s bond buying program could be announced in November after the Fed’s next policy-setting meeting. Fed officials also penciled in an interest rate increase in 2022.

Powell said there remains “a range of views” among Fed officials about the state of the U.S. economic rebound, while warning that higher interest rates next year aren’t set in stone, in an afternoon news conference.

“It looks like we are on track for a November tapering announcement,” said Kathy Jones, chief fixed-income strategist at Charles Schwab, in a phone interview. But she also explained that the “dot plots” now implying four rate increases, or a 1% increase, through the end of 2023 would be a “pretty significant rate of increases.”

“Dots are just dots. They are going to move,” she said. “It’s not a done deal, or a forecast, just an estimate,” Jones said.

A number of analysts had pegged November or December as a likely time frame for an official Fed announcement for tapering its monthly purchases of $120 billion in Treasurys and mortgage-backed securities, with an eye toward concluding those purchases at in the middle of next year.

The longer-term outlook for policy interest rates, which currently stand in a range between 0% and 0.25%, now shows benchmark interest rates potentially climbing as high as 1.8% by the end of 2024.

Read: Fed could fracture in 2022 over when to raise interest rates, economist says

“We’ve been through a move in the dot plots already,” said Giorgio Caputo, head of JO Hambro Capital Management’s multi-asset team, adding that any fits of weakness in stocks this year have been extremely short lived.

“The little dips, the blips, they get bought,” Caputo said, in a phone interview. “The thing is, market liquidity does evaporate when volatility spikes.”

“Even through we seem to have processed this latest wobble, or are in the process of processing, the risk continues to remain that one of these days we’ll have a more significant air pocket,” he said.

For markets, worries about China’s indebted property company Evergrande subsided on Wednesday.

Frankfurt-listed shares of China Evergrande surged 50% after a unit of the company, Hengda Real Estate Group, pledged to make an on-time interest payment on Thursday. Separately, China’s central bank reportedly injected liquidity as markets reopened after a two-day holiday and talk of a restructure of Evergrande has eased some of the initial panic on Wall Street about potential financial contagion akin to what occurred in 2008 when U.S. investment bank Lehman Brothers failed.

However, investors remain wary as Evergrande still faces interest payments on bonds in coming days.

“While the markets are rebounding, we think its to soon to think the Evergrande situation will blow over without causing more near- term market pain,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

The U.S. debt ceiling issue also was in focus Wednesday, after a group of former U.S. Treasury secretaries, including Henry Paulson, Timothy Geithner and Robert Rubin, sent a letter to Congressional leadership calling for Washington to avoid an “unprecedented default” that could “serious economic and national security harm.”

The House voted late Tuesday to keep funding the government and avoid a shutdown, but faced opposition in the Senate given the Republican party’s opposition to raising the debt ceiling.

See: Washington is now the stock-market ‘wild card’ as debt-limit showdown looms

In U.S. economic news, investors parsed an August update on existing home sales, which retreated as inventory and prices remained major concerns for prospective buyers. Existing-home sales dropped 2% to a seasonally-adjusted, annual rate of 5.88 million in August, the National Association of Realtors said. Compared with August 2020, home sales were down 1.5%.

Which companies are in focus?
How are other assets trading?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.314%

    was almost 1 basis point lower around 1.332%, after the Fed decision. Yields and debt prices move in opposite directions.
  • The ICE U.S. Dollar Index
    DXY,
    +0.26%
    ,
    a measure of the currency against a basket of rivals was 0.1% lower at 93.10.
  • Oil futures closed higher, with the U.S. benchmark
    CL00,
    +2.11%

    up 2.5% to settle at $72.23 a barrel. Gold futures
    GC00,
    -0.61%

    rose about 0.03% to settle at $1,778.80 an ounce, but slipped later in electronic trading.
  • In Asia, Hong Kong was closed for a holiday, but reopening after a two-day break, China’s CSI 300
    000300,
    -0.70%

    fell 0.7%. The Nikkei 225 index
    NIK,
    -0.67%

    dropped 0.6%.
  • Markets in Europe rose. The Stoxx Europe 600 index
    SXXP,
    +0.99%

    booked a 1% gain and London’s FTSE 100 index
    UKX,
    +1.47%

    gained 1.5%.

Barbara Kollmeyer contributed reporting

The Fed: Fed officials say tapering ‘may soon be warranted’ and earlier interest hike pencilled in

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