US stocks rebounded this week from a rout that drove the market down for three straight weeks after recent comments from Federal Reserve officials buoyed sentiment and a reading on inflation expectations eased.

The S&P 500 gained more than 3 per cent Friday, the most since May 2020. It closed the week up 6.5 per cent, clocking in its best week in nearly a month. A rally in Treasuries waned on Friday, but the policy-sensitive US two-year yield still recorded its biggest weekly drop since mid-May. 

While traders grappled with a flurry of data this week, sentiment improved on Friday after the University of Michigan’s gauge of longer-term consumer inflation expectations settled back from an initially reported 14-year high, potentially reducing the urgency for steeper rate hikes. Investors were also reassured by St. Louis Fed President James Bullard, who said worries over a US recession are overblown. Fed Chair Jerome Powell hardened his resolve to cool inflation in testimony to lawmakers this week, but some traders found solace in his comments as a signal that the central bank will factor in the probability of a recession as it moves to curtail inflation.

“We’ve now seen a couple of days of positive performance in the market and that’s indicative of a very short-term bear rally,” said Sylvia Jablonski, CEO of Defiance ETFs, by phone. “The fact that we’re past the Fed meeting and any kind of Fed testimony, barring any additional bad news, this could continue for the next couple of days.”

Earnings season will be the telltale as to whether the rally continues, she said. 

Others are still waiting to see how bond markets react to recent Fed comments and economic data. 

“The volatility in the fixed income market has been even higher than the equity market when you take the move versus the VIX,” said John Flahive, head of fixed income investments at BNY Mellon Wealth Management. “That’s been really underpinning all the uncertainty across all the capital markets and one of our catalysts needed to kind of calm down the equity market, to get a bit of a footing, would really be for the bond markets to calm down.”

Elsewhere, Bitcoin rose, hovering around US$21,000. The dollar fell. West Texas Intermediate crude rose after retreating over the previous two sessions. Sliding raw materials prices have contributed to a moderation in market-based measures of inflation expectations. 

“It would appear that the Fed has succeeded at least temporarily” in its mission to cool an overheated economy, Lewis Grant, a senior portfolio manager at Federated Hermes, wrote in a note to clients. “Commodity prices have tumbled from their highs as recession fears grow.”

Sales of new US homes jumped in May, reflecting gains in the West and South and interrupting a months-long skid as the residential real estate market adjusts to rising borrowing costs and still-elevated prices. The pickup in sales may reflect some buyers locking in their mortgage rate in anticipation of even higher borrowing costs.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 3.1 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 3.5 per cent
• The Dow Jones Industrial Average rose 2.7 per cent
• The MSCI World index rose 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.3 per cent
• The euro rose 0.3 per cent to US$1.0556
• The British pound rose 0.2 per cent to US$1.2284
• The Japanese yen fell 0.2 per cent to 135.21 per dollar

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.13 per cent
• Germany’s 10-year yield advanced one basis point to 1.44 per cent
• Britain’s 10-year yield declined one basis point to 2.30 per cent

Commodities

• West Texas Intermediate crude rose 2.9 per cent to US$107.34 a barrel
• Gold futures fell 0.1 per cent to US$1,827.20 an ounce