Dow climbs 600 points as US stocks on track to snap three weeks of losses

What’s driving the markets?

Commodity prices have been falling for two weeks, which has forced the market to reassess the path of the Federal Reserve’s rate hikes. Judging by Fed Funds futures, which are used to bet on the path of the Fed’s benchmark interest-rate target, investors now expect the Fed funds rate to peak at between 3.25% and 3.50% in December. That’s down from 3.50% to 3.75% one week ago, according to the CME’s FedWatch tool. Furthermore, investors now expect the Fed to start cutting rates roughly one year from today.

Meanwhile, the University of Michigan’s final reading on consumer sentiment showed expectations for inflation five to 10 years out had been revised lower to 3.1%, down from 3.3% in an earlier reading.

“We’ve seen a two week drop in commodity prices and now we are seeing Fed funds futures pricing in rate cuts out in 2023. The thing holding back the market was endless rate hikes, if we’ve found the terminal rate then stocks can make headway here, ”said Mike Antonelli, a market strategist at Baird.

The moderation in inflation expectations has helped bond yields to cool this week, with the 10-year Treasury note yield BX: TMUBMUSD10Y
receding at its fastest rate since March – although long-term Treasury yields moved modestly higher on Friday.

On the growth side of the equation, markets continued to factor in the possibility of “a recession stopping rate hikes in their tracks much sooner,” said Jeffrey Halley, senior market analyst at OANDA, in a note to clients.

Federal Reserve Chairman Jerome Powell said on Thursday that he doesn’t think a recession is inevitable, but that he does have an “unconditional” commitment to fight inflation. He has also said the Fed hopes to rein in higher prices without sparking an economic downturn. A day earlier, the Fed chairman acknowledged that a recession was “certainly a possibility.” Strategists blamed Powell’s use of “the R-word” for inspiring a rethink on the US economy’s growth path.

Market strategists also attributed the bounce in stocks this week to technical factors, as some debated whether this week’s action marked the start of a bear-market rally – or simply fizzle into another “dead cat bounce.”

“The moves this week could still turn out to be the result of a financial market genetically preprogrammed to buy dips in equity and bond prices, thanks to two decades of central bank largess. It could also be a bear market correction as the stampede for the exit door got overdone in the short term, leading to a short-squeeze, ”said Halley.

Read: Don’t trust the stock-market bounce until the S&P 500 is back above 3,800: analysts

Read: Here’s the comment from Powell that could make it hard for the Fed to slow down the pace of interest-rate hikes

In other economic data news, a gauge of new home sales for May came in stronger than expected. Investors heard from St. Louis Fed President James Bullard, who said Friday morning that the Fed must act aggressively to curb inflation before expectations become unanchored.

San Francisco Fed President Mary Daly, who will speak at 4 pm Eastern.

Single-stock movers

• FedEx FDX
  shares rallied after the company shared strong profit and sales guidance for the rest of the year, while reporting higher-than-expected quarterly profits. Shares rose 7%.

• Zendesk ZEN
  shares were up 28% on reports the company is headed for a $ 10 billion acquisition.

• Cruise line and resort stocks outperformed on Friday, including Norwegian Cruise Line Holding NCLH
  s, Carnival Corp. CCL,
  Royal Caribbean RCL,
  Wynn Resorts WYNN
  and MGM Resorts MGM.
  The move appeared to be driven by Carnival’s latest earnings report.

Other markets

• The 10-year Treasury yield TY00
  climbed to 3.12% on Friday, although it remains sharply lower after peaking near 3.50% earlier this month.

• The ICE US Dollar Index DXY,
  A measure of the greenback’s strength against a basket of rivals, was off 0.3%.

• Gold futures GC00
  expiring in August were down 0.1%.

• The European STOXX 600 FXXP00
  climbed 2.6%, while the UK’s FTSE 100 UK: UKX
  index tumbled 1%.

• The Shanghai Composite was up 0.9%, while Hong Kong’s Hang Seng Index gained 2%; Japan’s Nikkei 225 index rose 1.2%.