U.S. stocks bounce on economic optimism; dollar pauses rally

NEW YORK, Oct 13 (Reuters) – Wall Street rose on Wednesday in choppy trade as investors saw an imminent end to ultra-loose U.S. monetary policy as a vote of confidence in the economy, while two-year Treasury yields hit 18-month highs on bets that policy tightening is in the offing.

Indeed, the Federal Reserve signalled on Wednesday it could start reducing its crisis-era support for the U.S. economy – which is set to grow this year at its fastest pace in decades – by the middle of next month, with a growing number of policymakers worried that high inflation could persist longer than previously thought. read more

General optimism about economic growth helped the S&P 500 (.SPX) to reverse losses late in the day to gain 0.30%, while the Nasdaq Composite (.IXIC) jumped 0.73% and the Dow Jones Industrial Average (.DJI) ended flat.

The pan-European STOXX 600 index (.STOXX) rose 0.70% and MSCI’s gauge of stocks across the globe (.MIWD00000PUS) gained 0.48%.

Figures earlier had showed the U.S. consumer price index rising 0.4% last month, higher than an expected 0.3%, as Americans paid more for food, rent and a range of other goods, and highlighting the challenges of strained supply chains. read more

While some investors have worried that accelerating inflation that is compounded by soaring oil prices could retard economic growth and cause it to stagnate, sparking ‘stagflation’, analysts at JPMorgan argued on Wednesday that such fears were “overblown.”

“Persistent inflation suggests we remain in a hot economy, which could prompt the Fed to move sooner,” analysts from Bank of America said in a note.

“Historically, equity markets did well in periods of oil price increases, in particular those periods that followed a crisis,” the analysts said. They recommended that investors allocate more cash to shares in the energy, materials, industrial and financial sectors relative to other investments.

Bets of tighter monetary policy flattened the U.S. yield curve.

The two-year Treasury yield jumped to 0.394%, a level last seen March 2020, before receding to 0.36%. Benchmark 10-year yields declined to 1.5403%, from 1.58% late on Tuesday.

That left the spread between 10-year and two-year Treasury yields at around 118 basis points, the lowest in over two weeks.

A flatter yield curve dents banks’ profitability and weighed on bank shares.

Shares in JPMorgan Chase & Co (JPM.N) dropped 2.6% for the day despite better-than-expected third-quarter earnings. read more

The dollar, which has benefited from bets that tighter U.S. monetary policy would burnish its appeal as a higher-yielding currency, took a breather on Wednesday.

The dollar index fell 0.42% to 94.033 from a one-year high of 94.563 struck the previous day. A softer dollar helped the euro to jump 0.56% off a near 15-month low to…