Dow books 4th day of gains, stocks rally after Fed minutes signal flexibility on interest rate hikes

What drove the markets?

Stocks closed higher after the Federal Reserve released minutes of its early May meeting, which signaled the central bank remains open to rethinking aggressive plans to raise rates to tame high inflation.

Minutes from the May meeting showed support for half-point moves by the Fed as it seeks to get its policy rate “expeditiously toward neutral,” over the next couple of meetings and that high inflation remains a key focus.

“The one thing this Fed is very good at is being measured,” said Eric Merlis, managing director of global markets at Citizens, by phone. “I chose to see this as a recognition that they’re not going to go headlong along a path,” he said. “They recognize things could change.”

Concerns have been mounting about the potential for the Fed to tighten financial conditions too sharply and damage the economy, particularly with businesses and households already facing the sharpest price pressures in decades.

The fear is economic growth will slow quickly, with the war in Ukraine and China’s COVID lockdowns worsening the outlook. 

U.S. benchmark stock indexes have suffered this month after grim earnings outlooks from several major retailers. More reports this week could help inform how other companies are handling inflationary pressures. Snowflake SNOW and Nvidia NVDA are set to post quarterly reports after the bell Wednesday. Costco COST will report on Thursday.

“I think the market has put in a bottom,” said Peter Cardillo, chief market economist at Spartan Capital Securities, by phone.

The S&P 500’s recent testing of the 3,850 level, but then finding higher ground, helped inform his rationale. Cardillo also said investors have been “through the discounting process of high inflation,” aggressive tightening of financial conditions by the Fed and the probability of a recession.

Read: S&P 500 hovers near bear market. Its ferocity may depend on the economy.

Fed Chairman Jerome Powell earlier laid plans for the central bank to boost the benchmark interest rate by half-a-percentage point at the next two FOMC meetings in June and July, bringing it to near 2% by August.

After that, Bill Adams, chief economist for Comerica Bank, said he expects the Fed to make a series of quarter-percentage-point rate hikes at the September, November and December meetings, raising the fed funds to a 2.5% to 2.75% target range at year-end.

Read: Fed’s Bostic calls for caution as Fed raises rates: ‘Even firetrucks with sirens blaring slow down at intersections’

The minutes also focused on potential outright sales of the central bank’s mortgage bondholdings as it looks to reduce its near $9 trillion balance sheet. Adams at Comerica said he expects those to start in September, in written commentary.

On the economic front, an outlook Wednesday from the Congressional Budget Office pointed to high inflation that persists into next year. In data, orders at U.S. factories for long-lasting goods such as machinery and electronics rose 0.4% in April, signaling the economy was still growing at a steady pace in the early spring. Economists polled by The Wall Street Journal had forecast a 0.7% increase.

Which companies were in focus?

• Shares of Dick’s Sporting Goods Inc.  DKS soared 9.7% Wednesday, after the sporting goods and apparel retailer reported fiscal first-quarter results that beat expectations.
• Express Inc. shares  EXPR  jumped 6.7% Wednesday, after the clothing retailer posted a narrower-than-expected loss for the first quarter and offered guidance that was above consensus. 
• Wendy’s WEN rallied 9.8% after longtime shareholder Trian Fund Management said it was exploring an acquisition or other potential deal for the restaurant chain. Trian is the company’s largest shareholder, with a 19.4% stake.
• Kohl’s Corp. KSS shares gained 11.9% on Wednesday after Reuters reported that bidders continue to circle the retailer at lower prices than earlier this year, but still well above recent trading levels of the stock.
• Nordstrom JWN surged 14% after the retailer raised its annual sales and profit forecast late Tuesday.

How did other assets trade?

• The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 1.2 basis points to 2.746%, as investors sought safety in government debt. Yields and Treasury prices move opposite each other.
• The ICE Dollar Index  DXY,  which measures the greenback against major currencies, was up 0.3%.
• In oil futures CL,  West Texas Intermediate crude for July delivery  CLN22  gained 0.5% to settle at $110.33 a barrel. Gold for June delivery GCM22  dropped 1% to close at $1,846.30 an ounce.
• Bitcoin  BTCUSD  was up 1% nearly $29,600.
• In European equities, the Stoxx Europe 600  XX:SXXP closed up 0.6%, while London’s FTSE 100 UK:UKX  edged 0.5% higher.
• In Asia, the Shanghai Composite  CN:SHCOMP finished 1.2% higher, while Hong Kong’s Hang Seng Index  HK:HSI gained 0.3% and Japan’s Nikkei 225 index  JP:NIK  dropped 0.3%.

—-Barbara Kollmeyer contributed reporting to this article.