Optimism About Interest Rate Outlook May Lead To Continued Strength On Wall Street

The major U.S. index futures are currently pointing to a higher open on Thursday, with stocks likely to extend the upward move seen over the past few sessions.

Optimism about the outlook for interest rates may contribute to strength on Wall Street following the Federal Reserve’s monetary policy announcement on Wednesday.

The Fed left interest rates unchanged for the third time in the past four meetings, leading to optimism that the central bank is done raising interest rates.

Treasury yields moved notably lower on Wednesday and are seeing further downside this morning, potentially adding to the buying interest.

“Many Fed officials in recent weeks have indicated that rates were high enough now that they could pause,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “Inflation is slowing, but not yet back to the 2% target range. This is the most important metric the Fed is watching right now.”

“Even though third-quarter economic growth came in quite strong, and several job market indicators continue to show strength, so long as inflation continues to come down, the Fed is likely to pause at this level for some time,” he added. “We expect its next move will be a cut in next year’s second quarter.”

The latest economic data may add to the optimism about rates, with the Labor Department releasing a report showing an unexpected uptick in first-time claims for U.S. unemployment benefits in the week ended October 28th.

The report said initial jobless claims crept up to 217,000, an increase of 5,000 from the previous week’s revised level of 212,000.

Economists had expected jobless claims to come in unchanged compared to the 210,000 originally reported for the previous week.

A separate report from the Labor Department also showed an unexpected decrease in unit labor costs in the third quarter.

The Labor Department said unit labor costs fell by 0.8 percent in the third quarter after shooting up by a revised 3.2 percent in the second quarter.

Unit labor costs were expected to climb by 0.7 percent compared to the 2.2 percent increase that had been reported for the previous quarter.

After moving mostly higher early in the session, stocks saw further upside over the course of the trading day on Wednesday. The Dow closed higher for the third consecutive session, climbing further off last Friday’s seven-month closing low.

The major averages pulled back off their highs going into the close but held on to strong gains. The Nasdaq surged 210.23 points or 1.6 percent to 13,061.47, the S&P 500 jumped 44.06 points or 1.1 percent to 4,237.86 and the Dow advanced 221.71 points or 0.7 percent to 33,274.58.

Stocks saw continued strength later in the session amid a positive reaction to the Federal Reserve’s widely expected decision to leave interest rates unchanged.

The Fed said it decided to maintain the target range for the federal funds rate at 5.25 to 5.50 percent, marking the third time in four meetings that the central bank has refrained from raising rates.

The accompanying statement suggested the Fed is still considering additional rate hikes in an effort to return inflation to its 2 percent objective, but traders seem optimistic the recent cycle of increase is over.

“The Fed tried to deliver a hawkish hold but Wall Street is not believing additional tightening will happen this cycle,” said Edward Moya, senior market analyst at OANDA.

The latest statement also said, “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

The Fed’s September statement only cited “tighter credit conditions,” with the inclusion of “financial” coming amid the recent surge in treasury yields.

“Some might take this as a sign that the bond market will continue to help them with this tightening cycle, which could support the argument that a peak in rates is in place,” said Moya.

The early strength on Wall Street came as the release of some weaker than expected U.S. economic data eased concerns about the outlook for interest rates.

Payroll processor ADP released a report before the start of trading showing private sector employment in the U.S. increased by less than expected in the month of October.

The report said private sector employment climbed by 113,000 jobs in October after rising by 89,000 jobs in September. Economists had expected employment to jump by 150,000 jobs.

A separate report released by the Institute for Supply Management showed manufacturing activity in the U.S. unexpectedly contracted at a faster rate in the month of October.

The ISM said its manufacturing PMI fell to 46.7 in October from 49.0 in September, with a reading below 50 indicating a contraction. Economists had expected the index to come in unchanged compared to the previous month.

Housing stocks moved sharply higher over the course of the session, resulting in a 3.5 percent spike by the Philadelphia Semiconductor Index.

Substantial strength was also visible among semiconductor stocks, with the Philadelphia Semiconductor Index surging by 2.3 percent. The index climbed further off the five-month closing low set on Monday.

Advanced Micro Devices (AMD) led the way higher after reporting better than expected third quarter earnings and providing upbeat guidance for its AI chip business.

Computer hardware stocks also saw considerable strength on the day, as reflected by the 1.9 percent jump by the NYSE Arca Computer Hardware Index.

Software, retail and biotechnology stocks also showed strong moves to the upside, while networking, telecom and tobacco stocks bucked the uptrend.

Commodity, Currency Markets

Crude oil futures are climbing $0.54 to $80.98 a barrel after falling $0.58 to $80.44 a barrel on Wednesday. Meanwhile, after slipping $6.80 to $1,986.50 an ounce in the previous session, gold futures are rising $9.80 to $1,997.30 an ounce.

On the currency front, the U.S. dollar is trading at 150.09 yen versus the 150.95 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.0654 compared to yesterday’s $1.0570.

Asia

Asian stocks posted strong gains on Thursday, while the dollar weakened and bond yields eased after comments from Fed Chair Jerome Powell suggested that the U.S. central bank is hitting pause again on its rate-hiking campaign.

After leaving interest rates unchanged at a two-decade high for the second straight policy meeting, the Federal Reserve on Wednesday indicated that policy would likely remain unchanged into 2024.

China’s Shanghai Composite Index ended down 0.5 percent at 3,009.41, reversing earlier gains. Hong Kong’s Hang Seng Index advanced 0.8 percent to 17,230.59, paring initial gains.

Japanese shares rose sharply on expectations that U.S. yields may have peaked. The Nikkei 225 Index closed 1.1 percent higher at 31,949.89 after having crossed the key psychological 32,000 mark for the first time in two weeks. The broader Topix Index rose 0.5 percent to 2,322.39.

Chip-related shares led the surge, with Advantest spiking 10 percent and Tokyo Electron gaining 4.9 percent. Tech investor SoftBank Group advanced 1.5 percent.

Seoul stocks rallied despite signs of accelerating inflation. Data showed the country’s headline inflation accelerated for a third straight month to reach a seven-month high in October amid higher food costs. The Kospi soared 1.8 percent to 2,343.12.

Australian markets rose despite weak trade data. The benchmark S&P/ASX 200 Index gained 0.9 percent to close at 6,899.70, with bank and tech stocks pacing the gainers. The broader All Ordinaries Index settled 1.0 percent higher at 7,095.

Across the Tasman, New Zealand’s benchmark S&P NZX-50 Index jumped 1.8 percent to 11,044.44.

Europe

European stocks have moved sharply higher on Thursday, extending gains for a fourth consecutive session amid optimism that the U.S. Federal Reserve is done with raising interest rates.

The Bank of England left its benchmark interest rate unchanged for the second straight meeting. The Monetary Policy Committee voted by a majority of 6-3 to maintain the Bank Rate at 5.25 percent. Three members sought a quarter point hike.

In economic news, data showed German unemployment rose more than expected in October. Separately, HCOB’s final eurozone manufacturing PMI, compiled by S&P Global, dropped to 43.1 in October from September’s 43.4.

While the French CAC 40 Index has surged by 1.9 percent, the German DAX Index is up by 1.6 percent and the U.K.’s FTSE 100 Index is up by 1.2 percent.

Danish pharma major Novo Nordisk has moved notably higher after reporting record sales and operating profits for the third quarter.

BT Group, Britain’s biggest broadband and mobile provider, has also soared after quarterly earnings beat forecasts.

Shell has also jumped. The oil giant announced a $3.5 billion share buyback after reporting a$6.2 billion profit for the third quarter, matching estimates.

Trainline shares have also surged. The online vendor moved its forecasts for the full year towards the top end of its guidance after pre-tax profit rose for the first half of fiscal 2024.

Alstom has also spiked in Paris after it secured an eight-year services contract extension worth around €950 million from CrossCountry in the United Kingdom.

Schneider Electric has also risen. The company focused on digital automation and energy management said that it has finalized the acquisition of EcoAct SAS, a climate consultation and net zero solutions provider.

Engineering & construction firm Technip Energies has also moved sharply higher after confirming its full-year guidance.

Hugo Boss has also jumped. The fashion house confirmed its full-year outlook after delivering third quarter sales in line with expectations.

Airline Lufthansa has also surged after reporting higher third quarter profit and confirming the outlook for 2023 and 2024.

Klockner has also moved higher. The steel and metal distributing company said its U.S. subsidiary Kloeckner Metals Corp has agreed to acquire Industrial Manufacturing Services for an undisclosed amount.

On the other hand, Ladbrokes-owner Entain has moved to the downside after lowering its profit margin forecast for the year.

Hikma Pharma has also slumped despite forecasting core operating margin growth for its generics business at the upper end of its earlier guidance for this year.

U.S. Economic Reports

The Labor Department released a report on Thursday showing an unexpected uptick in first-time claims for U.S. unemployment benefits in the week ended October 28th.

The report said initial jobless claims crept up to 217,000, an increase of 5,000 from the previous week’s revised level of 212,000.

Economists had expected jobless claims to come in unchanged compared to the 210,000 originally reported for the previous week.

The Labor Department said the less volatile four-week moving average also inched up to 210,000, an increase of 2,000 from the previous week’s revised average of 208,000.

A separate report from the Labor Department showed labor productivity in the U.S. shot up by more than expected in the third quarter of 2023.

The Labor Department said labor productivity soared by 4.7 percent in the third quarter after surging by a revised 3.6 percent in the second quarter.

Economists had expected productivity to spike by 4.2 percent compared to the 3.5 percent jump that had been reported for the previous quarter.

Meanwhile, the report said unit labor costs fell by 0.8 percent in the third quarter after shooting up by a revised 3.2 percent in the second quarter.

Unit labor costs were expected to climb by 0.7 percent compared to the 2.2 percent increase that had been reported for the previous quarter.

At 10 am ET, the Commerce Department is scheduled to release its report on new orders for manufactured goods in the month of September. Factory orders are expected to surge by 2.3 percent in September after jumping 1.2 percent in August.

St. Louis Federal Reserve Interim President Kathleen O’Neill Paese is due to give welcome remarks before a Homer Jones Memorial Lecture event at 6:30 pm ET.