Stocks climb on bets Fed can achieve soft landing

Stocks rose after strong economic reports revived speculation the Federal Reserve will be able to engineer a soft landing even if it keeps interest rates higher for longer. The euro fell on bets the European Central Bank will stay on hold after hiking on Thursday.

All major groups in the S&P 500 advanced as the gauge topped 4,500.

The Dow Jones Industrial Average added 1%.

Earlier in the day, equity futures pared gains as retail sales and producer prices beat estimates.

Arm surged 25% in its trading debut. Disney climbed as Bloomberg News reported the company has held initial talks about selling ABC to Nexstar Media Group.

Ford and General Motors underperformed, with Detroit carmakers facing the threat of a strike.

Traders also braced for Friday’s expiration of options tied to stocks and indexes, which has the potential to cause volume spikes and trigger volatility.

“Stocks are higher after another round of impressive U.S. economic data suggests the consumer is still doing just fine,” said Edward Moya, senior market analyst for the Americas at Oanda.

“Wall Street seems content with the risk of one more Fed rate hike as consumer resilience is expected to gradually weaken. While the U.S. growth story is still alive, the outlook for Europe remains uninspiring as stagflation risks grow.”

The latest data reinforce our view the U.S. economy is headed for a period of moderate growth, avoiding a recession over the coming 12 months, according to Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

“That should support equities,” she noted. “However, uncertainty is likely to keep broad equity markets choppy.”

There are still suggestions of an overheating economy that will encourage Fed hawks who believe strong growth today will lead to higher inflationary pressures,” according to Will Compernolle, macro strategist at FHN Financial.

“The odds are still heavily in favor of the Fed leaving rates unchanged next week, but the dot plot showing another increase later this year,” he noted.

Bond traders have spent most of the last two months worrying about persistent inflation and an economy that seems to be running hot, according to Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

The most-recent economic data just reinforced that, he noted.

“The Fed has indicated that they want to slow down the pace of rate increases, and for that reason they are still likely to keep rates unchanged at next week’s meeting, but all of the data that is coming in higher than expected is going to put pressure on them to raise rates again at the following meeting,” Zaccarelli added.

Bridgewater Associates founder Ray Dalio said he doesn’t want to own bonds and prefers cash, highlighting difficulties investors face as global central banks try to manage inflation.

Meantime, the Fed’s former Vice Chair Richard Clarida said fiscal policy risk is more likely to drive up U.S. bond yields than further tightening from the central bank.