U.S. stocks staged a broad rebound Friday even as hotter inflation sharply increased expectations for another Federal Reserve rate hike, with investors instead focusing on a sudden retreat in oil prices and long-term Treasury yields.
The S&P 500 gained about 0.9%-1%, the Nasdaq Composite rose roughly 1%, and the Dow Jones Industrial Average climbed around 500 points, reversing part of this week’s selloff. All 11 S&P 500 sectors traded higher early in the session, an unusually broad move that has occurred only a handful of times this year.
The rally came despite August consumer inflation rising 0.4% month over month and 3.4% from a year earlier. Traders responded by increasing the probability of a quarter-point Fed hike next week to roughly 85% from 67% before the report.
Normally, that combination would be difficult for equities.
This time, oil changed the equation.
Oil’s $6 Reversal Gives Wall Street Relief
Brent crude briefly reached $109.97 per barrel Friday before reversing sharply to around $104, down more than 3% on the session. WTI similarly fell back below $100 after reports that Middle Eastern foreign ministers were exploring a temporary arrangement with Iran to manage shipping through the Strait of Hormuz.
That matters because rising energy costs have been one of the biggest forces behind Wall Street’s recent inflation fears.
Thursday’s combination of $100 oil and 5.4% producer inflation had already pushed the S&P 500, Dow and Nasdaq lower, a backdrop covered in the previous stock-market selloff.
Friday effectively produced the opposite setup: oil fell, long-term Treasury yields retreated from their intraday highs, and stocks rebounded.
The 10-year Treasury yield briefly reached 4.9915%, its highest in almost three years, before slipping toward 4.94%. The 30-year touched 5.424%, a 19-year high, before falling back toward 5.32%.
That pullback is particularly important for expensive technology shares because higher Treasury yields reduce the value investors assign to future earnings.
A Rate Hike Is No Longer Automatically Bearish
Friday’s reaction also shows that investors are separating energy-driven inflation from more persistent underlying inflation.
Core CPI eased to 2.4% year over year, while much of the headline pressure came from energy. That leaves investors betting that a September hike may not necessarily begin a long tightening cycle if oil eventually normalizes.
The key question now is whether Friday marks a durable reversal or simply relief after four consecutive S&P 500 declines.
Wall Street still faces a 10-year yield hovering near the psychologically important 5% level, while the 30-year Treasury remains above 5%. That longer-term valuation threat has already become a major market issue as the 30-year yield returned to levels last seen around 2007.
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