Stocks Open Higher in the U.S As Bonds Continue to Rally, With S&P 500 Close to 4-month Highs

U.S. stock markets continued their upward trajectory in the morning on Wednesday, building on the November rally. This surge was fueled by the ongoing decline in Treasury yields, driven by growing optimism that the Federal Reserve is concluding its efforts to raise benchmark interest rates to counter inflation.

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Taking a closer look at the stock indexes' performance, the S&P 500 saw an increase of 50 points, equivalent to a 0.1% rise, reaching 4,581. The Dow Jones Industrial Average added 47 points, a 0.2% uptick, reaching 35,464, while the Nasdaq Composite climbed 122 points, marking a 0.9% increase to 14,403. In the preceding day's trading, the Dow industrials rose by 0.2% to 35,417, the S&P 500 increased by 0.1% to 4,555, and the Nasdaq Composite gained 0.3% to 14,282.

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The impetus behind this market movement on Wednesday was the S&P 500's extension of its robust November rally, positioning it to record its most impressive month in over a year. This positive momentum was underpinned by the diminishing borrowing costs in the U.S. as reflected in declining Treasury yields.

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The 10-year Treasury yield, which reached a 16-year peak just above 5% in October, receded to approximately 4.28% in early Wednesday trading. This drop in yields was attributed to investor optimism that a decline in inflationary pressures would prompt the Federal Reserve to cease raising policy rates and potentially initiate rate reductions in the coming months. The market sentiment was evident in the CME FedWatch tool, which indicated an increased probability (45.5%) of a rate cut by at least 25 basis points in March 2024, up from a mere 21% in the previous session.

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This shift in expectations followed remarks from Fed Governor Chris Waller on Tuesday, suggesting that the current monetary policy is well-positioned to moderate economic growth and bring inflation back to the target of 2%. Analysts, including Stephen Innes, Managing Partner at SPI Asset Management, interpreted Waller's comments as confirmation that the Federal Reserve has concluded its interest rate hikes, aligning with the market's sentiment, as earlier rate hikes had already been largely factored out earlier in the month.

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Investors are eagerly awaiting Federal Reserve Chair Jerome Powell's speech on Friday to discern whether his stance aligns with Waller's purportedly more dovish outlook. On Wednesday, other Fed officials scheduled to speak include Richmond Fed President Thomas Barkin at 10 a.m. and Cleveland Fed President Loretta Mester at 1:45 p.m.

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In terms of economic data, the Bureau of Economic Analysis reported that the U.S. economy grew at a 5.2% seasonally adjusted annual rate in the third quarter, surpassing expectations of 5% and the previous estimate of 4.9%. Additionally, the Commerce Department revealed that the U.S. trade deficit in goods widened to $89.8 billion in October, while an advanced estimate of wholesale inventories indicated a 0.2% drop in October.

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Further economic updates scheduled for Wednesday include the Federal Reserve's Beige Book of economic anecdotes, set to be published at 2 p.m. Eastern. Notable inflation data, in the form of the PCE index for October, is slated for release on Thursday at 8:30 a.m. Eastern.

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The decline in U.S. Treasury yields has also impacted the dollar negatively, potentially benefiting U.S. corporations with overseas sales. The dollar index was at its lowest level since August, contributing to the rise in the price of gold, which surpassed the $2,000 an ounce mark.

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However, some market observers are expressing concerns that the recent optimism in the bond market has left not only the S&P 500 but many segments of the market susceptible to a potential pullback. Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, highlighted indicators such as the relative strength index, signaling that correction might be imminent. Ozkardeskaya emphasized that increased evidence of a hard landing for the U.S. economy could be the only factor justifying a further reduction in U.S. yields from current levels, aligning with the market's anticipation of a 100 basis points rate cut by the Fed next year.

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In terms of corporate earnings, companies reporting results on Wednesday include Foot Locker, Dollar Tree, and Petco Health and Wellness before the opening bell, followed by Snowflake, Salesforce, and Okta after the close.

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