Stocks gain as investors take 'bad news is good news' approach

Stocks rose for a fourth straight day as another batch of economic reports pointed to moderation, cementing bets the Federal Reserve is approaching the end of its interest-rate hikes.

The S&P 500 topped 4,500.Apple Inc. led gains in megacaps, while regional banks fell. Bloomberg News reported the Fed issued a slew of private warnings to lenders with assets between $100 billion and $250 billion in a bid to tighten supervision. In late trading, software company Salesforce Inc. climbed on a bullish outlook. Treasury yields edged lower. Swap contracts priced in less than a 50% chance of another quarter-point US rate increase this year.

“Investors are reacting with a ‘bad news is good news’ approach, betting that a slowing economy will lead to a less aggressive Federal Reserve,” said Mark Hackett, chief of investment research at Nationwide. “This has calmed investors, but adds an element of risk if the pendulum continues to swing, as an earnings recovery is critical for a continued strong market.”

The Citigroup Economic Surprise Index for the US extended its plunge below 50 — after topping 80 earlier this month — showing recent reports have trailed forecasts. Economists have “adjusted expectations to reality,” and upward surprises are becoming more difficult, Hackett noted.

The US economy made more limited progress in the second quarter than initially estimated while separate data showed employment growth is moderating. Gross domestic product rose at a 2.1% annualized pace, representing a markdown from the government’s previous estimate, as business investment in equipment and inventories were revised lower. In the first quarter, the economy expanded at a 2% rate.

“The reality of the current state of the economy is likely in the middle,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “To the extent that investors view any signs that the economy is moving into a ‘not too hot, not too cold’ phase that could bring an end to Fed tightening, it could be viewed as a positive, at least briefly.”

Elsewhere, the euro rose as inflation slowed less than expected in Germany and quickened in Spain, offering European Central Bank officials a partial picture of the region’s price pressures as they judge whether to raise interest rates again. Oil edged up as the market took a substantial drop in US crude stockpiles in stride.

Corporate Highlights:

• A Tesla Inc. plan to purchase hard-to-get construction materials is being investigated by US prosecutors, who are looking at whether the project was an appropriate use of company funds. The shares halted a three-day advance.
• Apple is testing the use of 3D printers to produce the steel chassis used by some of its upcoming smartwatches, according to people with knowledge of the matter, heralding a major change to how the company manufactures products.
• Visa Inc. and Mastercard Inc. rose on plans to boost the fees that many retailers pay when accepting customers’ credit and debit cards.
• HP Inc. sank after cutting its profit outlook and acknowledging that a rebound in personal-computer demand isn’t coming as quickly as hoped.
• American Airlines Group Inc. flight attendants gave their union leaders approval to trigger a strike if the labor group is eventually allowed to end contract negotiations under federal labor law. The shares retreated.

Key events this week:

• China manufacturing PMI, non-manufacturing PMI, Thursday
• Japan industrial production, retail sales, Thursday
• Eurozone CPI, unemployment, Thursday
• ECB publishes account of July monetary policy meeting, Thursday
• US personal spending and income, initial jobless claims, Thursday
• China Caixin manufacturing PMI, Friday
• Eurozone S&P Global Eurozone Manufacturing PMI, Friday
• South African central bank governor Lesetja Kganyago, Atlanta Fed President Raphael Bostic, BOE’s Huw Pill, IMF’s Gita Gopinath on panel at the South African Reserve Bank conference, Friday
• Boston Fed President Susan Collins speaks at virtual event, Friday
• US unemployment, nonfarm payrolls, light vehicle sales, ISM manufacturing, construction spending, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.4% as of 4 p.m. New York time
• The Nasdaq 100 rose 0.6%
• The Dow Jones Industrial Average rose 0.1%
• The MSCI World index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%
• The euro rose 0.4% to $1.0922
• The British pound rose 0.6% to $1.2717
• The Japanese yen fell 0.3% to 146.26 per dollar

Cryptocurrencies

• Bitcoin fell 1.4% to $27,192.53
• Ether fell 1.4% to $1,702.19

Bonds

• The yield on 10-year Treasuries fell one basis point to 4.11%
• Germany’s 10-year yield advanced four basis points to 2.54%
• Britain’s 10-year yield was little changed at 4.42%

Commodities

• West Texas Intermediate crude rose 0.7% to $81.71 a barrel
• Gold futures rose 0.3% to $1,971.60 an ounce

This story was produced with the assistance of Bloomberg Automation.