Wall Street gains as bond yields fall and Fed officials sound dovish

Oct 10, 202318:57 UTC

US10Y

DJI

SPX

IXIC

Key points:

PepsiCo up after lifting annual profit forecast
Bond yields fall as investors looked for safety
Indexes up: Dow 0.45%, S&P 0.61%, Nasdaq 0.68%

Wall Street indexes advanced on Tuesday with the S&P 500 and the Nasdaq touching three-week highs as dovish comments from U.S. Federal Reserve officials pushed Treasury yields lower.

Following the comments from top Fed officials on Monday, Atlanta Fed President Raphael Bostic said the U.S. central bank does not need to raise interest rates any further, and that he sees no recession ahead.

The 10-year Treasury yield US10Y came off its 16-year peak on Tuesday, on track for its steepest single-day drop since May, as trading resumed in the U.S. bond market which had been closed for a holiday on Monday.

But while oil prices eased after Monday's rally, investors were still closely monitoring developments the Middle East.

Israeli air strikes attacked Gaza on Tuesday, razing entire districts in the densely populated and impoverished enclave, filling morgues with Palestinians, including women and children, as it took "revenge" for a deadly weekend of Hamas attacks that triggered some of the worst blood-letting in 75 years.

"Everybody has one eye on the Middle East conflict and one eye on what's happening with bond yields. The decline in bond yields is the key driver today," said John Praveen, managing director & co-chief investment officer at Paleo Leon.

While the Fed's dovish comments were helping stocks on Tuesday and investors were being sanguine about the Middle East, Praveen said that view could change if for example the fighting spread to other countries in the region.

"If tensions escalate bond yields might decline further because they're a safe haven but equities would sell off in that instance because of increased uncertainty and risk aversion," he said.

The Dow Jones Industrial Average DJI rose 150.07 points, or 0.45%, to 33,754.72, the S&P 500 SPX gained 26.34 points, or 0.61%, to 4,362 and the Nasdaq Composite IXIC added 92.12 points, or 0.68%, to 13,576.36.

All 11 major S&P 500 sectors were advancing with materials S5MATR and consumer staples S5CONS leading gains, while technology S5INFT was the slowest gainer. Energy SPN was among the laggards after its more than 3% rally on Monday.

Also on Tuesday, Fed Governor Christopher Waller reiterated the U.S. central bank's determination to reduce inflation to its 2% target, but did not comment on the economic outlook or his view on the best immediate course for monetary policy.

Remarks from other Fed officials, including Minneapolis' Neel Kashkari and San Francisco's Mary Daly, were also expected.

Traders put the chance of interest rates remaining unchanged in November and December at around 86% and 73%, respectively, according to CME's FedWatch tool.

Later in the week, focus will turn to inflation readings, including September producer price and consumer price indexes as well as the Fed's September meeting minutes. Also Friday is when third-quarter earnings season kicks off in earnest.

Among stocks, PepsiCo PEP rose about 2% after the soft drinks company raised its annual profit forecast for a third time this year. Rival Coca-Cola KO was also up 2%.

Truist Financial TFC was up 6.4% after a report that the bank is in talks to sell its insurance brokerage unit to private equity firm Stone Point for about $10 billion.