Dow records best three-day gain since April after Fed keeps interest rate steady

What drove markets

Stocks ended higher Wednesday after the Federal Reserve kept its policy interest rate steady at the range of 5.25% to 5.5%, as widely expected.

Read: Fed holds interest rates steady, keeps further hikes on the table

In their policy statement, the Fed said it would take into account a wide array of data “in determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time.”

Officials also said that inflation remains elevated, while job gains “have moderated” but “remained strong.” They added that the U.S. economy “expanded at a strong pace in the third quarter”.

“In our view the statement came across as balanced,” Ellen Zentner, chief U.S. economist and analysts at Morgan Stanley wrote in a Wednesday note.

“On the one hand the Fed chose not to soften its tightening bias. On the other hand, in listing factors that would likely weigh on the economy it added financial conditions into consideration alongside the previously noted credit conditions,” Zenter said.

In Fed chair Jerome Powell’s news conference, when asked central bankers’ views on tighter financial conditions, he said those tighter conditions, including rising long-term Treasury yields, a stronger dollar, and lower equities and other factors, could potentially affect future monetary policy decisions. But the tightening must prove to be “persistent.”

He also said that the Fed is “not confident yet” that interest-rate policy is sufficiently high enough to bring down inflation, and rate cuts are just not on the table right now.

“My biggest takeaway was that the Fed is acknowledging tighter financial and credit conditions but they are still seeing fairly strong economic activity,” according to David Merrell, managing member and founder of TBH Advisors.

“So they are hopeful that it’s gonna have more effect based on where rates currently stand, and that’s why you are gonna see them pause for longer, and wait for those accumulative rate hikes to take effect,” Merrell said in a call. “Jerome Powell will never admit they are on hold. They are gonna keep that stance that we will possible raise rates,” Merrell said.

Meanwhile, the Institute for Supply Management said its closely watched index of manufacturing activity fell deeper into contraction territory in October.

The ISM manufacturing reading fell 2.3 points to 46.7 in October, the lowest level since July. Economists surveyed by The Wall Street Journal had forecast the index to inch up to 49.2%. Any number below 50% reflects a shrinking activity. Manufacturing has contracted for 12 straight months. Cooler activity is seen taking pressure off the Fed to keep tightening monetary policy.

“The surprise slump in the ISM manufacturing index to 46.7 in October, from 49.0, suggests the recent recovery in factory-sector activity is fading and supports our view that the upturn in economic growth in the third quarter is set to be reversed,” said Andrew Hunter, deputy U.S. chief economist at Capital Economics, in a note.

At the same time, however, a closely followed index of labor market tightness offered no sign of cooling. Job openings rose slightly in September to 9.6 million, indicating there’s still plenty of demand for labor.

However, businesses in the U.S. created just 113,000 new jobs in October, private sector payroll processor ADP said, in a potential sign of a slackening labor market. Economists polled by The Wall Street Journal had forecast a 130,000 increase.

Earlier, in an eagerly anticipated announcement, the U.S. Treasury Department said it would sell $112 billion in notes and bonds next week, not far out of line with expectations.

Many investors have partly blamed the rise in benchmark bond yields in recent weeks
BX:TMUBMUSD10Y
to 16-year highs on the market’s fear about increased supply of Treasurys.

See: U.S. Treasury to auction $112 billion next week in refunding, up $9 billion from last quarter

Companies in focus

• WeWork Inc.
  WE,
  -46.49%
  shares sank 47% after The Wall Street Journal reported that the co-working-space provider was planning to file for bankruptcy protection.

• Advanced Micro Devices Inc.
  AMD,
  +9.69%
  rose 9.7% after a third-quarter beat for the chip maker, shaking off a weaker-than-expected forecast for current-quarter revenue spooked investors.

• CVS Health Corp.’s stock
  CVS,
  -0.41%
  ended 0.4% lower, after the drugstore chain posted stronger-than-expected third-quarter earnings, shrugging but offered profit guidance for the full year. 

— Jamie Chisholm contributed.