Interest Rate Optimism May Lead To Continued Strength On Wall Street

The major U.S. index futures are currently pointing to a modestly higher open on Monday, with stocks likely to add to the strong gains posted in the previous session.

Stocks may continue to benefit from optimism about the outlook for interest following last Friday’s report on producer price inflation.

While hopes the Federal Reserve will lower rates by another 50 basis points next month have largely evaporated, the data reinforced optimism the central bank will cut rates by 25 basis points.

Overall trading activity is likely to be relatively subdued, however, with some traders likely to be away from their desks due to the Columbus Day holiday.

A lack of major U.S. economic data may also keep some traders on the sidelines ahead of the release of key reports on retail sales and industrial production later in the week.

Earnings news from big-name companies, such as Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Johnson & Johnson (NYSE:JNJ), UnitedHealth (NYSE:UNH), Morgan Stanley (NYSE:MS) and Netflix (NASDAQ:NFLX), is also likely to attract attention in the coming days.

Following the modest pullback seen in Thursday’s session, stocks showed a strong move back to the upside during trading on Friday. The major averages more than offset Thursday’s losses, with the Dow and the S&P 500 reaching new record closing highs.

The major averages pulled back off their best levels going into the close but remained firmly positive. The Dow jumped 409.74 points or 1.0 percent to 42,863.86, the S&P 500 climbed 34.96 points or 0.6 percent to 5,815.03 and the Nasdaq rose 60.89 points or 0.3 percent to 18,342.94.

For the week, the Dow surged by 1.2 percent, while the Nasdaq and the S&P 500 both shot up by 1.1 percent.

The strength on Wall Street partly reflected a positive reaction to a Labor Department report showing producer prices in the U.S. were unexpectedly unchanged in September.

The Labor Department said its producer price index for final demand came in flat in September after rising by 0.2 percent in August. Economists had expected producer prices to inch up by 0.1 percent.

The report also said the annual rate of growth by producer prices slowed to 1.8 percent in September from an upwardly revised 1.9 percent in August.

Economists had expected the annual rate of producer price growth to dip to 1.6 percent from the 1.7 percent originally reported for the previous month.

“After an upside surprise from the September CPI report, producer prices came in below expectations and provide support for a 25bps rate cut in November,” said Matthew Martin, Senior U.S. Economist at Oxford Economics.

Traders also reacted positively to earnings news from big-name banks, with shares of Wells Fargo (NYSE:WFC) surging by 5.6 percent after the company reported better than expected third quarter earnings.

JPMorgan Chase (NYSE:JPM) also jumped by 4.4 percent after reporting third quarter results that exceeded analyst estimates on both the top and bottom lines.

Meanwhile, a steep drop by shares of Tesla (NASDAQ:TSLA) limited the upside for the Nasdaq, with the electric vehicle maker plunging by 8.8 percent amid a negative reaction to its long-awaited robotaxi event.

Banking stocks saw substantial strength on the upbeat earnings news from Wells Fargo and JPMorgan, driving the KBW Bank Index up by 3.0 percent to its best closing level in over two years.

Significant strength was also visible among transportation stocks, as reflected by the 2.1 percent surge by the Dow Jones Transportation Average.

Brokerage stocks also showed a strong move to the upside on the day, with the NYSE Arca Broker/Dealer Index climbing by 1.7 percent.

Biotechnology, computer hardware and natural gas stocks also saw notable strength, moving higher along with most of the other major sectors.

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