Dovish Fed officials boost Wall Street as bond yields retreat

By Sinéad Carew and Shashwat Chauhan

(Reuters) – Wall Street indexes closed higher on Tuesday after dovish comments from U.S. Federal Reserve officials pushed Treasury yields lower while investors cautiously monitored developments in the Middle East.

Following the comments from top Fed officials on Monday, Atlanta Fed President Raphael Bostic said the U.S. central bank does not need to raise interest rates any further, and that he sees no recession ahead.

The came off its 16-year peak on Tuesday, on track for its steepest single-day drop since May, as trading resumed in the U.S. bond market which had been closed for a holiday on Monday.

Israeli air strikes attacked Gaza on Tuesday, razing entire districts in the densely populated and impoverished enclave, filling morgues with Palestinians, including women and children, as it took “revenge” for a deadly weekend of Hamas attacks that triggered some of the worst blood-letting in 75 years.

“Everybody has one eye on the Middle East conflict and one eye on what’s happening with bond yields. The decline in bond yields is the key driver today,” said John Praveen, managing director & co-chief investment officer at Paleo Leon.

While the Fed’s dovish comments were helping stocks on Tuesday and investors were being sanguine about the Middle East, Praveen said that view could change if for example the fighting spread to other countries in the region.

“If tensions escalate bond yields might decline further because they’re a safe haven but equities would sell off in that instance because of increased uncertainty and risk aversion,” he said.

Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, also attributed the stock market’s gains to declining bond yields even as he said “the level of risk in the world has gone up considerably.”

“The action yesterday and today, given what’s happened in Israel has really surprised me. But the flight to safety has made Treasury yields fall enough to push up equities,” Tuz said.

According to preliminary data, the S&P 500 gained 22.97 points, or 0.52%, to end at 4,358.24 points, while the Nasdaq Composite gained 79.03 points, or 0.59%, to 13,563.27. The Dow Jones Industrial Average rose 134.78 points, or 0.41%, to 33,741.83.

Late on Tuesday, Minneapolis Federal Reserve Bank President Neel Kashkari said he believes the U.S. economy is on track for a soft landing in which inflation falls back to the Fed’s 2% goal but the unemployment rate does not rise sharply.

Earlier in the say, Fed Governor Christopher Waller reiterated the U.S. central bank’s determination to reduce inflation to its 2% target, but did not give his view on the economic outlook or the best course for monetary policy.

Traders put the chance of interest rates remaining unchanged in November and December at 89.6% and 70.5%, respectively, according to CME’s FedWatch tool.

Later in the week, focus will turn to inflation readings, including September producer price and consumer price indexes as well as the Fed’s September meeting minutes. Also Friday is when third-quarter earnings season kicks off in earnest.

Among stocks, PepsiCo (NASDAQ:) rose about after the soft drinks company raised its annual profit forecast for a third time this year. Rival Coca-Cola (NYSE:) also gained.

Truist Financial (NYSE:) shares rallied after a report that the bank is in talks to sell its insurance brokerage unit to private equity firm Stone Point for about $10 billion.

Rivian (NASDAQ:) Automotive advanced sharply after UBS upgraded the EV maker’s stock to “buy” from “neutral”.