By Chuck Mikolajczak and Shashwat Chauhan
NEW YORK, Sept 30 (Reuters) – The Nasdaq rose on Wednesday and the S&P 500 fell, but both indexes posted their second straight quarterly gain as a weaker-than-expected inflation reading dampened expectations that Federal Reserve officials would raise rates in October.
The U.S. Commerce Department said the personal consumption expenditures (PCE) price index rose 3.4% on an annual basis in August, below the 3.7% estimate of economists polled by Reuters.
Separately, the final reading of second-quarter GDP data was revised upward to an annualized rate of 2.2%, thanks to strong consumer spending and investments helping to fuel AI infrastructure development.
Rising crude oil prices due to the U.S.-Iran war and sky-high diesel fuel costs have fueled inflationary concerns and pushed U.S. Treasury yields higher. Fed officials have indicated that further rate hikes may be necessary if price pressures fail to moderate after the central bank raised interest rates by 25 basis points this month.
Stocks lost ground before the closing bell, however, as the yield on 2-year U.S. Treasuries, which typically moves in line with the Fed’s interest rate expectations, became slightly higher on the day. Longer-term yields have continued to rise amid expectations of solid economic growth.
Market expectations for a rate hike of at least 25 basis points at the Fed’s October meeting have fallen to about 37%, according to CME’s FedWatch tool, from about 51% in the previous session and almost 71% a week ago.
Analysts also noted that recent methodology changes in the Bureau of Economic Analysis’s calculation of PCE contributed to the lower reading.
“What the market is focused on is, can the economy continue to grow and can it handle these higher interest rates? And I would say the market so far has been a bit of a story that when the economy is growing, when earnings are strong, when there’s a secular theme, it looks beyond higher interest rates,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.
“However…if these higher rates stay at these high levels for longer, it will probably start to potentially do more damage to the bond side of the portfolio, it could limit credit or available credit. And if investors start to think that these conditions could weigh on economic growth or on corporate profitability over the next couple of quarters, then I think you would see a very rapid negative market reaction.”
QUARTERLY GAINS OF THE S&P AND NASDAQ NOTCH
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