Stocks closed solidly higher Wednesday, after volatile morning trade that saw benchmarks flipping between gains and losses, as investors digested a round of conflicting economic data that showed strength in the U.S. services sector but signaled a potential weakening of the labor market.
Erratic morning trade gave way to solid gains in the afternoon, as investors keyed in on falling bond yields that have reinforced hopes that the Federal Reserve will cut interest rates this year, a move that was seen as more likely following comments made by Federal Reserve Chairman Jerome Powell on Tuesday.
How did the benchmarks fare?
The Dow Jones Industrial Average rose 207.39 points, or 0.8%, to end at 25,539.57, while the S&P 500 index finished 22.88 points higher at 2,826.15, also a gain of 0.8%. The Nasdaq Composite Index rose 48.36 points, or 0.6% to close at 7,575.48.
At session lows the S&P had lost 2.27 points, or less than 0.1% and the Nasdaq was down 28.95 points, or 0.4%
What drove the market?
Payroll data firm ADP estimated that the U.S. economy added just 27,000 private-sector jobs in May, well below the 175,000 predicted by economists, according to Econoday, and the lowest reading in nine years.
The report added to concerns over a slowing domestic economy, but was followed by a reading of the Institute for Supply Management’s services-sector index, which came in stronger than expected.
The data arrived against a backdrop of rising hopes that the Federal Reserve will cut interest rates this year, potentially in response to the economic impact of rising trade tensions between the U.S. and several partners. Bond markets appeared to ratify this line of thinking, with the yields on both the 10-year and 2-year Treasury note falling Wednesday, while the yield on the 30-year Treasury bond rose.
This steepening of the long end of the yield curve may suggest that bond investors believe the Fed will cut rates in the short term, but remain optimistic about long-term growth.
Powell on Tuesday said the central bank was monitoring escalating trade tensions and would “act as appropriate” to sustain domestic economic expansion, which has showed signs of waning as Washington wages tariff disputes on multiple fronts.
Powell’s comments imply that the Fed might look to lower benchmark interest rates, which stand at a range between 2.25% to 2.50%, which would reduce borrowing costs for corporations and has sparked fresh enthusiasm for buying equities.
Read: Powell says Fed watching impact of trade tensions on economic outlook.
Trade tensions, however, remain the reality, with the Trump administration saying it will raise import duties against Mexico on Monday. Republican Senators, however, are at least privately pushing back on the president’s plan to use tariffs to force Mexico to stem the tide of Central American immigrants seeking to enter the U.S., according to severalnews reports.
White House trade adviser Peter Navarro appeared to leave the door open to avoiding the threatened 5% tariffs on all Mexican imports during an interview with CNN on Wednesday morning. “We believe that these tariffs may not have to go into effect precisely because we have the Mexicans’ attention,” he said, noting that Vice President Mike Pence, Secretary of State Mike Pompeo and others will meet with Mexican officials today in Washington to discuss immigration policy.
Some prominent Senate Republican, meanwhile, have pushed back against the Mexico tariff threat.
Meanwhile, Chinese officials have indicated that the world’s second-largest economy could restrict exports of rare-earth elements, which are key ingredients in products ranging from mobile phones to rechargeable batteries to jet fighters, to retaliate against the U.S. tariff increases and sanctions against tech giant Huawei.
Read: Is threat of withholding rare-earth metals a key weapon in China’s trade war with U.S.?
Commerce Secretary Wilbur Ross told Bloomberg News on Tuesday (paywall) that the U.S. will take steps to ensure that it isn’t cut off from rare-earth supplies.
Read: U.S. trade war with China may turn rare earth elements into economic pawns
However, U.S. Treasury Secretary Steven Mnuchin is scheduled to meet with People’s Bank of China Gov. Yi Gang over the weekend at a G-20 meeting in Japan, according to Reuters-a development viewed as an upbeat sign amid Sino-American trade tensions.
Also see: Powell signals it might be time to wave goodbye to the Fed’s ‘dot plot’
What data and Fed speakers were in focus?
The Institute for Supply Management services sector index came in at 56.9%, versus the consensus estimates of 55.8% and compared with April’s 55.5%.
The Federal Reserve released its beige book for April through mid-May, which described the U.S. economy as expanding at a “modest pace overall,” though it also reported anecdotal evidence that labor shortages and new tariffs are holding back growth.
Wednesday will see a number of other Fed speakers, including Dallas Fed President Robert Kaplan, who told CNBC Wednesday morning that with respect to interest-rate policy, “I think it’s too soon to make a judgment on whether we might or might not take an action, I’d rather be patient here and let events unfold a little bit more.” It would take “further deceleration” of the U.S. economy to warrant a rate cut, he said.
Kaplan is a nonvoting member of the central bank’s interest-rate setting committee this year.
Fed Vice Chairman Richard Clarida delivered opening remarks at the same monetary policy strategy conference in Chicago where Powell spoke on Tuesday.
Federal Reserve Board member Gov. Michele Bowman testified at her confirmation hearing in front of the Senate Banking Committee for a full 14-year term, while Boston Fed President Eric Rosengren will moderated a panel entitled “Transmission of Monetary Policy to the Economy: Beyond the Headlines” in Chicago.
Which stocks were in focus?
Salesforce.com Inc. also reported earnings Tuesday evening, announcing that its adjusted first-quarter earnings had risen more than 25% compared with last year’s first quarter, while analysts had expected a decline. The stock rose 5.1% Wednesday.
What did the strategists say?
“With the ADP coming out and showing the lowest number in nine years, we’re seeing signs of a U.S. economy slowing,” Dom Catrambone, chief executive of Whitford Asset Management, told MarketWatch.
Nevertheless, the market has been able to shake off those concerns due to rising hopes that the Federal Reserve will cut interest rates this year, he added, pointing to rising gold prices as evidence that investors remain cautious about the state of the economy.
“What you heard yesterday was that the Fed will be there for the economy if needed, and you weren’t hearing that before,” Catrambone said.
“The flexibility of the Fed if needed to cut rates has set the stage for another positive trading session. On the macro front, the Beige Book Survey and the ADP Employment situation are in focus,” wrote Peter Cardillo, chief market economist at Spartan Capital, in a daily research note.
“We see the Beige Book reveling a mixed economic environment as the trade war bites into the economy,” he wrote.
How did other markets trade?
Stocks in Asia mostly closed higher. Japan’s Nikkei 225 rose 1.8% and Hong Kong’s Hang Seng Index gained 0.5%. However, China’s Shanghai Composite Index and finished flat.
Stocks in Europe closed higher, with the Stoxx Europe 600 rising 0.4%.
In commodities markets, U.S. oil futures tumbled into a bear market, while gold prices surged. The U.S. dollar meanwhile, edged higher.