Wall Street extends rebound as hope for central bank pivot drives Dow, S&P, Nasdaq higher

Wall Street posted another day of robust gains on Tuesday, adding to a rebound that began the previous day, as stocks come further off their lows of the year. The recent upswing has come on hope that the Federal Reserve and other central banks will soon pull back on their aggressive rate-hiking campaigns.

Tuesday’s rally was spurred by a less-hawkish-than-expected move by Australia’s central bank and a labor-market report that suggested the Fed might soon be able to tilt away from peak hawkishness.

The Dow (DJI) finished +2.8%, the S&P 500 (SP500) ended +3.1% and the Nasdaq Composite (COMP.IND) closed +3.3%.

“This two-day rally is obviously resolving extremely oversold conditions, but I think it is also a function of the market recognizing that the Fed will not have to raise rates as high its rhetoric has suggested,” Lawrence Fuller of Fuller Asset Management told Seeking Alpha. “This is why interest rates across the curve are falling and stock prices are rising.”

Fuller added: “The wheels are in motion for a rapid decline in the rate of inflation next year, and the Fed should acknowledge that after a hike of 50 basis points in November.”

The recent upswing in stock prices has sparked speculation of a market bottom and raised hopes that more dovish global central banks will underpin further gains.

There were two main pieces of evidence for this bullish outlook on Tuesday. Overseas, the Reserve Bank of Australia encouraged those looking for a central bank pivot, hiking a less-than-expected 25 basis points after four hikes of 50.

In the U.S., stocks received a boost as JOLTs data eased worries about a tight labor market. The figures showed that job openings came in lower than expected at 10.053M. This compared to a consensus estimate of 10.755M.

“All we can say for sure is that this is the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in labor demand,” Pantheon Macro’s Ian Shepherdson said. “If it continues over the next few months, and core inflation falls as much as we expect, the Fed will not be hiking by 125bp by the year end. Our base case is 100bp, but 75bp or even 50bp now can’t be ruled out.”

Looking at the bond market, the 2-year Treasury yield (US2Y) rose around 1 basis point to 4.10%, having traded below 4% briefly, a big comedown from recent peaks above 4.30%. The 10-year Treasury (US10Y) slipped 3 basis points to 3.62%.

“This is not the first time a pattern of rising US bond yields and falling equity indices, was interrupted by a correction in the former,” SocGen’s Kit Juckes said. “US 10-year note yields had sizeable corrections in May and again in June/July, both of which triggered bear market rallies in the equity market.”

In other economic data, August factory orders stalled at 0.0% versus the forecast for a rise of 0.3%.

Among active stocks, Fed-sensitive names in airlines, casinos and cruise lines showed strength. Meanwhile, Twitter jumped in the middle of the day on news that Elon Musk had reopened the possibility of closing his deal to buy the social media giant.