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Wednesday, March 22, 2023

Wall Street rises for best week since June on rate expectations

By STAN CHOE, AP Business Writer

NEW YORK (AP) — Wall Street racked up more gains Friday in its huge rally a day earlier to close out its best week since the summer.

The S&P 500 rose 0.9% on the day after rising 5.5% on its best day in more than two years. The Dow Jones Industrial Average added 32 points to its gain of more than 1,200 from the previous day, while the Nasdaq Composite jumped 1.9%.

Markets got a boost after China relaxed some of its strict COVID-19 measures, which have been hurting the world’s second-largest economy. Hopes of further growth from China helped not only stocks but also oil prices higher, with US crude gaining 2.9% to $88.96 a barrel.

The main reason for this week’s euphoria in markets was a report on Thursday that showed US inflation slowed more than expected last month. That raised hopes that the worst of inflation is over and the Federal Reserve may be less aggressive in raising interest rates to rein them in, though analysts have warned high inflation could slowly ease with some calling the big rally of Wall Street as exaggerated.

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What the Fed does with rates is crucial for Wall Street because hikes slow the economy and can trigger a recession, while dragging down stock prices. They have been the main reason for the markets’ struggles this year.

Perhaps as important as how bad inflation is right now is how high American households see it in years to come. That’s because expectations that are too high can set off a vicious cycle in which people speed up purchases and make other moves that further inflame inflation.

The Fed has said that avoiding such a fatal loop is one of the reasons it has moved so aggressively on 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 next year among households rose to 5.1% from 5% the previous month, according to a University of Michigan survey. Meanwhile, long-term inflation expectations rose to 3%. But that’s still within the same range of 2.9% to 3.1% that they’ve been in for 15 of the last 16 months.

High inflation helped push down the survey’s reading of overall consumer confidence by more than economists had expected.

“The consumer is very focused on inflation and feels it every day,” said Brian Price, director of investment management at Commonwealth Financial Network. “I wouldn’t expect us to see any upside to 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 basically zero in March. The likely scenario remains that it rises further next year and then keeps rates at that high level for some time.

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

“They’ve been pretty clear all along that they were going to bring forward interest rate increases,” Price said. “They need some time to assess the data in the coming months.”

Traders are increasingly betting that the fed funds rate could top a range of 4.75% to 5% early next year, according to CME Group. A week ago, they saw a higher final rate as more likely, with a sizable portion expecting something like 5.25% to 5.50%.

Bond markets were closed for trading in observance of Veterans Day. On Thursday, yields tumbled as investors lowered their expectations about how aggressively the Fed will raise rates.

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

The market has routinely reacted with wild swings after each month’s inflation data release, according to Jonathan Golub, chief US equity strategist at Credit Suisse. And while Thursday’s report “was clearly very positive, the market response appears to be out of sync with the size of the surprise.”

Companies that do a lot of business in China and the region looked particularly strong on Friday following the relaxation of anti-COVID restrictions. Wynn Resorts rose 8.3% and Las Vegas Sands gained 5.5%.

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

On the losing side were the health care companies. Elevance Health fell 5.8% and Cigna fell 6%.

Meanwhile, in the crypto market, prices plunged again amid the industry’s latest crisis of confidence. One of the biggest trading platforms, FTX, has filed for bankruptcy after its users began fighting to get their money out over fears of its financial strength and after a larger rival rejected a deal to buy the troubled 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 affect confidence in the broader industry.

Bitcoin dipped below $16,800, down 6% from the previous day, according to CoinDesk. He set his record of nearly $69,000 almost exactly a year ago, and topped $21,000 a week ago.

AP business writers Damian J. Troise, Joe McDonald and Matt Ott contributed.

Copyright 2022 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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