Dow jumps more than 600 points as bond yields fall after reports Fed may shift to smaller rate hikes after November

How stock indexes are trading

• The Dow Jones Industrial Average DJIA, +2.47% advanced 626 points, or 2.1%, to 30,960.
• The S&P 500 SPX, +2.36% rose 72 points, or 2%, to about 3,738.
• The Nasdaq Composite COMP, -1.01% gained 192 points, or 1.8%, to 10,807.

Stocks finished lower on Thursday after erasing early gains, with the Dow Jones Industrial Average falling 90 points, or 0.3%, to 30,334, the S&P 500 declining 29 points, or 0.8%, to 3,666, and the Nasdaq Composite dropping 66 points, or 0.61%, to 10,615. However, all three indexes remain on track for their best weekly gain in at least a month.

What’s driving markets

U.S. stocks were trading higher Friday afternoon as investors considered a report from The Wall Street Journal, along with comments by San Francisco Fed president Mary Daly, suggesting that the Federal Reserve could potentially begin to back off slightly from its aggressive pace of interest-rate hikes late this year,

“We are starting to hear some rumblings that the Fed might be at least easing the aggressive nature of the magnitude of the rate hikes,” said Mona Mahajan, senior investment strategist at Edward Jones, by phone Friday. Markets had been “very firmly” pricing in a 75-basis point hike in December, as well as next month, she said

While the U.S. central bank appears set to again lift its benchmark rate by three-quarters of a percentage point at its policy meeting in early November, there may be some debate among Fed officials over whether to hike rates by 50 basis points in December.

“That is the first step in what we call the beginning of the end,” said Mahajan. “Over time we’d expect the pace of rate hikes to slow,” followed by a pause at some point, and then an assessment of where inflation and the economy are heading, she said.

Fed funds futures traders on Friday priced in a lower probability of a 75 basis-point hike in December, with odds falling to less than 50% from 75% before the report, according to the CME’s FedWatch tool.

Meanwhile, Treasury yields took a break from their recent climb, helping to take some of the pressure off stocks. The yield on the two-year Treasury note TMUBMUSD02Y, 4.500% was down about nine basis points at 4.5% in Friday afternoon trading, while 10-year yields TMUBMUSD10Y, 4.214% dipped one basis point to around 4.21%, FactSet data show, at last check.

Ten-year and two-year yields had “gone up dramatically over the last couple days,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial, in a phone interview Friday. He worries that the stock market’s strong rally Friday may be an overreaction to “the assumption that the Fed might pause” its rate hikes.

All three major U.S. stock benchmarks are on track for weekly gains as investors continue to assess companies’ earnings results from the third quarter. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite are each on pace to advance more than 4% this week, according to FactSet data, at last check.

“Keep in mind we’ve had decent earnings all week despite some one-off stories,” said Mahajan.

So far, 101 S&P index 500 firms have reported earnings for the third quarter. And while income has shrunk by 2.8%, according to FactSet data, more than 73% of these companies have surpassed Wall Street’s profit expectations.

But shares of Snap Inc. SNAP, -29.80% plunged Friday after a disappointing report.

Read: Snap’s ad woes turn some of Wall Street’s worst fears into reality, sending the internet sector on a tumble

Investor are also keeping an eye on the options market.

A team of options strategists from Goldman Sachs Group said in a note to clients that open interest in options linked to major equity indexes and exchange-traded funds tracking those indexes has soared this year, while interest in single-stock options has waned.

This leaves the market vulnerable to major intraday swings on Friday as options dealers scramble to hedge their exposure to options that are close to trading in the money.

“If market makers or other options traders who delta-hedge their positions are net long [at the money] options, expiration-related flow could have the effect of dampening stock prices,” the team said in a note to clients.

Companies in focus

• Snap Inc. SNAP shares plunged 30% after the company reported disappointing earnings and said it’s expecting flat revenue growth for the fourth quarter.
• A report that the U.S. could subject Elon Musk’s pending acquisition for Twitter Inc. TWTR, -4.68% to a national security review sent the companies shares down 4.8%.
• Shares of American Express Co. AXP, -2.80% fell 2.6% after the company highlighted “mixed signals” in the U.S. economy, which helped to drive shares lower despite quarterly earnings beating Wall Street’s expectations.
• Intel Corp. INTC, +3.22% shares were up 2.9% after the company said it was planning on announcing “targeted” layoffs in November.

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