Wall St regains ground as fears of rising interest rates recede

Wall Street stocks rebounded on Wednesday from the previous session as the prospect of rate rises receded after weaker-than-expected jobs data and a clarification from the US Treasury secretary on remarks that had helped trigger a sell-off.

The Nasdaq Composite index was up 0.3 per cent in the afternoon in New York, after technology stocks tumbled on Tuesday, dragging wider US and European equity markets down with them. The blue-chip S&P 500 index gained 0.4 per cent on Wednesday while the Dow Jones Industrial Average climbed to a new record high.

US Treasury secretary Janet Yellen surprised markets on Tuesday by saying that rock-bottom US interest rates might have to rise to cool the rapidly recovering economy. However, she later clarified her remarks, which had an outsized effect on growth stocks because of their sensitivity to changing interest rate expectations, saying she did not foresee “an inflationary problem”.

Investors have debated for months what will prompt the US central bank to reduce its $120bn a month of bond purchases begun in March 2020. The Federal Reserve maintains that the US economy still needs monetary support as it emerges from the pandemic.

Ahead of the US government’s comprehensive non-farm payrolls numbers due on Friday, ADP data released on Wednesday showed US private sector employers added 742,000 new jobs in April, below the 800,000 forecast by economists polled by Reuters.

This rate of hiring was strong enough to satisfy investors banking on continued economic growth but not so rapid it would amplify concerns that the Fed would change its stance on interest rates, said Georgina Taylor, multi-asset fund manager at Invesco.

“Markets are hostage to everything remaining as it is, with continued recovery while central bank policy stays supportive,” Taylor said. “As long as the economic data isn’t a disaster or extremely strong, people feel they don’t have to think about a different investment regime.”

In Europe, the region-wide Stoxx 600 benchmark closed up 1.8 per cent, with the continent’s tech subsector climbing 2.7 per cent, having fallen 3.8 per cent a day earlier, its worst performance since last October.

UK gilts, which have dropped in price this year as investors have anticipated a run-up in inflation that would erode returns from the fixed-interest securities, weakened ahead of a Bank of England meeting on Thursday. The yield on the 10-year UK government bond rose 0.02 percentage points to 0.82 per cent, having risen from 0.175 per cent at the start of 2021.

The BoE last month became the largest buyer of gilts under its quantitative easing programme, aimed at supporting financial markets through the pandemic. Some analysts are now looking ahead to the central bank reducing these purchases.

“The Bank of England remains a long way off tightening monetary policy, but could be one of the first central banks to signal it is thinking about it, possibly in early 2022,” said Shamik Dhar, chief economist at BNY Mellon Investment Management.

The dollar, as measured against a basket of trading partners’ currencies, traded flat. Global oil benchmark Brent crude slid 0.3 per cent to $68.68 a barrel.