Stocks turn higher, bond yields retreat from climb

US stocks rushed higher on Tuesday after recovering from earlier declines, extending a recent series of back-and-forth trading as bond yields retreated after this morning’s surge.

The S&P 500 (^GSPC) gained 0.6%, reversing a 1% loss that briefly took it to a two-year low, while the Dow Jones Industrial Average (^DJI) gained 350 points, or 0.7% . The Nasdaq Composite (^IXIC) rose 0.4% after the tech-heavy index hit its lowest level since July 2020 at the start of the week. Meanwhile, the benchmark 10-year government bond fell after testing the key 4% level.

Investors are navigating a dismal week marked by inflation data from producers and consumers and the first reporters of the third-quarter earnings season, which includes four of the country’s largest banks by assets.

Markets remain jittery as the government’s consumer price index (CPI) is due out Thursday, which likely shows inflation has remained persistently high despite aggressive US Federal Reserve intervention to slow the economy. Following the release of August CPI data on Sept. 13, the S&P 500 plunged 4.3% on its worst day of the year so far.

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Analysts at JPMorgan warned in a note on Tuesday that the S&P 500 could fall as much as 5% if the September read comes in above the previous month’s 8.3%.

In a rare admission, US Federal Reserve Vice Chairman Lael Brainard said that amid global macroeconomic uncertainty, policymakers need to be cautious about raising interest rates higher as previous rate hikes are still finding their way through the economy.

“By moving ahead consciously and data-driven, we can learn how economic activity, employment and inflation adjust to the cumulative tightening to inform our views on the path for policy rates,” she said Monday in the National Association for Business Economics, as the Federal Reserve targeting fourth hike of 75 basis points in November.

On Monday, JPMorgan chief executive Jamie Dimon said in an interview with CNBC that stocks could fall “an easy 20%” from current levels depending on the economic outcome of the Fed’s actions, and also warned that the US -Economy could enter recession by mid-2023.

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WASHINGTON, DC - SEPTEMBER 22: Jamie Dimon, CEO of JPMorgan Chase & Co, testifies during a Senate Committee on Banking, Housing and Urban Affairs Committee hearing on Capitol Hill on September 22, 2022 in Washington, DC.  The committee held the hearing on annual supervision of the country's largest banks.  (Photo by Drew Angerer/Getty Images)

WASHINGTON, DC – SEPTEMBER 22: Jamie Dimon, CEO of JPMorgan Chase & Co, testifies during a Senate Committee on Banking, Housing and Urban Affairs Committee hearing on Capitol Hill on September 22, 2022 in Washington, DC. The committee held the hearing on annual supervision of the country’s largest banks. (Photo by Drew Angerer/Getty Images)

Across the Atlantic, the Bank of England expanded its emergency bond purchases for a second time this week after Monday’s sell-off in long-dated gilts in a bid to stabilize financial conditions.

“A dysfunction in this market and the prospect of self-reinforcing ‘bailout’ momentum pose a significant risk to UK financial stability,” the bank warned in a statement.

The Bank of England’s move helped provide renewed support to gilt prices but did little to help the slumping sterling as US dollar strength fuels and continues to weigh on other currencies.

In the US, the strength of the dollar resulting from the Fed’s monetary policy actions was a pain for corporate America as it slashed sales and profits by eroding overseas earnings from products bought with weaker currencies . Currency headwinds have taken a hit on companies like Nike (NKE) and FedEx (FDX) in recent weeks and are likely to be cited by others reporting financial results.

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“We may hear more in the coming weeks about the pressure an exceptionally strong dollar can put on US exports and thereby US company profits, but dollar strength could also play a role in the Fed’s to back out of their tightening policies,” said Chris Larkin, Morgan Stanley’s managing director of trading at E*TRADE, in an emailed comment. “Even if continued dollar strength ultimately helps the Fed move from a rate hike to a rate cut, the timing of such a turn remains uncertain and may not alter the downward trend in corporate earnings.”

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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