U.S. stocks rallied on Wednesday as an improvement in consumer confidence and better-than-expected earnings boosted sentiment. Treasuries were mixed after Tuesday’s selloff as the furore following the Bank of Japan’s unexpected increase in its yield trading band ebbed. 

The S&P 500 rose for a second day, while the Nasdaq 100 climbed the most since late November. Both indexes are still down the most since 2008 for the year. The policy-sensitive two-year Treasury yield dropped four basis points on the day, while the benchmark 10-year yield remained fairly steady for most of the session. 

On Wednesday, FedEx Corp. and Nike Inc.’s earnings exceeding Wall Street’s estimates provided a reprieve for U.S. stocks that had been pummeled since the Federal Reserve’s hawkish turn last week. Investors did not hear from Fed speakers this week, which also helped fuel the so-called ‘Santa rally’ in stocks. The central bank’s policy makers are expected to become incrementally more dovish in 2023, with a new roster of senior officials. 

Traders also parsed fresh U.S. data on Wednesday indicating the Fed’s persistent rate hikes are serving their purpose by slowing the economy, but a recession may still be at bay. While sales of previously owned U.S. homes fell for a 10th-straight month in November, U.S. consumer confidence rose by more than forecast to the highest since April as inflation eased. 

“Investors are excited by the prospects of buying improving fundamentals at a cheaper price, following the past week’s selloff on Fed concerns,” said Mike Bailey, director of research at FBB Capital Partners. “In terms of macro data, improving consumer confidence is also adding to the favorable move in investor sentiment. However, I think inflation, the job market and earnings are top of mind for most investors at the moment.”

Traders will continue to contend with additional data this week. Real gross domestic product for the third quarter is likely to be revised down in Thursday’s release, and could be flat in the fourth quarter, said Bill Adams, chief economist for Comerica Bank. Data on Friday, meanwhile, will give investors more insight on consumer spending.

“We will be watching if spending and income hold up against inflation,” said David Donabedian, chief investment officer of CIBC Private Wealth U.S. “However, expectations are for a soft reading of the Personal Consumption Expenditures component, a key economic indicator and a focus of the Fed.”

Dust is also starting to settle on Japan’s decision to raise the upper limit of its 10-year bond yield, though the move has set in motion wagers the BoJ will join its peers next year in raising interest rates. Surging yields have already shrunk the worldwide stock of negative-yielding debt to about US$686 billion, from a US$18.4 trillion peak reached two years ago. 

The yen fell against the dollar, after posting its biggest daily rally since 1998 on Tuesday. The dollar wavered after falling for two days against a basket of currencies.

Elsewhere, oil price gains extended into a third day after a report showed a drop in U.S. crude inventories. 

Key events this week:

• U.S. GDP, initial jobless claims, U.S. Conf. Board leading index, Thursday
• U.S. consumer income, new home sales, U.S. durable goods, PCE deflator, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 1.5 per cent
• The Dow Jones Industrial Average rose 1.6 per cent
• The MSCI World index rose 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.1 per cent to US$1.0611
• The British pound fell 0.8 per cent to US$1.2086
• The Japanese yen fell 0.5 per cent to 132.34 per dollar

Cryptocurrencies

• Bitcoin fell 0.6 per cent to US$16,778.38
• Ether fell 0.6 per cent to US$1,209.24

Bonds

• The yield on 10-year Treasuries declined one basis point to 3.67 per cent
• Germany’s 10-year yield advanced one basis point to 2.31 per cent
• Britain’s 10-year yield declined two basis points to 3.57 per cent

Commodities

• West Texas Intermediate crude rose 2.9 per cent to US$78.46 a barrel
• Gold futures were little changed