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NEW YORK - US stocks could move higher next week after a bond market rout led investors to wonder if the threat of inflation was on the horizon or if the economy was actually stronger than expected, and thus good for stocks.
Major stock market gauges recovered on Friday (US time) after a bond sell-off pushed the benchmark 10-year US Treasury note's yield up to 5.25 per cent - matching the Fed funds rate target at one point - from levels below 5 per cent a week ago.
That jump in government bond yields rattled investors who, skittish about a bull market that has lasted longer than most, worry that rising capital costs will cut corporate profits.
Around midday on Friday, stocks began rallying as the 10-year note's yield retreated to around 5.11 per cent.
The recovery after a three-day slide is an indication of where the market is headed as investors realised that they overreacted to a spike in interest rates, said David Joy, market strategist at RiverSource Investments.
"Interest rates are where they should be, and we haven't had any inflation. This is a little adjustment to a new level of rates, a level that the stock market doesn't have a problem with," Joy said.
The blue-chip Dow Jones industrial average climbed 157.66 points, or 1.19 per cent, to end Friday's session at 13,424.39.
The broad Standard & Poor's 500 index gained 16.95 points, or 1.14 per cent, to finish at 1507.67. The Nasdaq Composite Index advanced 32.16 points, or 1.27 per cent, to close at 2573.54. Falling oil prices also helped the major US stock indexes rebound.
For the week, though, the effects of the pullback were visible, with the Dow average ending down 1.78 per cent, the S&P 500 falling 1.87 per cent and the Nasdaq losing 1.54 per cent.
For the year so far, however, the Dow is still up 7.71 per cent, while the S&P 500 is up 6.30 per cent and the Nasdaq is up 6.55 per cent.
With memories of the dot-com bust still fresh, many investors are cautious and trying to identify an inflection point, Joy said. But stronger growth and no inflationary pressures is good for stocks, he said.
Investors will look for any change in language about interest rates when the Federal Reserve releases its Beige Book summary of regional economic conditions on Wednesday.
Joy said he didn't expect to see the Fed change its stance. Since last June, the Fed has held its funds rate for overnight bank loans steady at 5.25 per cent.
The headline to watch for next week is inflation data and possible inflationary signs in an industrial output and capacity utilisation report that are due on Friday.
A Labour Department report is expected to show that the overall US Consumer Price Index rose 0.6 per cent last month from 0.4 per cent a month earlier.
The data will be preceded on Thursday by a look at prices at the wholesale level. The forecast for the overall US Producer Price Index calls for a gain of 0.6 per cent last month, following an increase of 0.4 per cent a month earlier.
- REUTERS
