Earnings enliven recession-focused markets ahead of Fed meeting

By Sinéad Carew and Sujata Rao

NEW YORK/LONDON (Reuters) – Wall Street shares gained ground on Wednesday after reassuring earnings reports and guidance from big U.S. companies, while bond yields fell and the dollar rose ahead of an expected Federal Reserve rate increase.

Oil futures rose after a report of lower inventories in the United States while cuts in Russian gas flows to Europe offset concerns about weaker demand and higher U.S. interest rates.

Ten-year U.S. Treasury bond yields – the reference rate for the global cost of capital – were down for the second session in a row but held off lows touched on Tuesday, while several bond market measures continued to signal a potential recession ahead.

The U.S. Federal Reserve is widely expected to deliver another 75 basis-point (bp) interest rate hike and investors will watch Fed Chair Jerome Powell’s news conference for clues on the central bank’s next moves..

Quarterly reports from Microsoft Corp and Google parent Alphabet Inc sparked a relief rally in heavyweight technology and growth stocks after Google ad sales beat expectations, while Microsoft said it was targeting double-digit revenue growth in this fiscal year.

“I don’t think they’re signalling that we’re out of the water. They’re signalling that they can operate in this type of environment profitably,” said Lindsey Bell, chief markets and money strategist at Ally Invest. “It’s making investors feel a little more comfortable that the worst may be behind us.”

The Dow Jones Industrial Average rose 121.5 points, or 0.38%, to 31,883.04, the S&P 500 gained 52.19 points, or 1.33%, to 3,973.24 and the Nasdaq Composite added 281.47 points, or 2.43%, to 11,844.04.

The pan-European STOXX 600 index rose 0.49% and MSCI’s gauge of stocks across the world gained 0.89%.

But despite the earnings cheer, investors’ mood was still cautious given the uncertain economic backdrop.

“Earnings are relatively resilient but they are backward looking as they are for the second-quarter so we are yet seeing the full effect of tighter monetary policy,” said Flavio Carpenzano investment director at Capital Group, which manages $2.6 trillion worth of assets.

With a combination of high inflation a tight labour market Carpenzano says “it’s difficult to envisage the Fed can slow or justify a slower hiking pace” .

The bond market is already pricing in an economic slowdown, if not a recession, as seen in the inversion of two- and 10-year Treasury note US2US10=RR yields. The short-end of the yield curve has been higher than the long end nearly all month, with the gap widening on Wednesday. [US/]

Benchmark 10-year notes last rose 5/32 in price to yield 2.7685%, from 2.787% late on Tuesday. The 2-year note last fell 1/32 in price to yield 3.0609%, from 3.043%.

The dollar index rose 0.028%, with the euro up 0.14% to $1.0128.

The Japanese yen weakened 0.19% versus the U.S. currency at 137.20 per dollar, while sterling was last trading at $1.2039, up 0.12% on the day.

Weighing on investors mood was also Europe’s fragile energy situation with gas flows from Russia’s Nord Stream 1 pipeline expected to halve from already reduced levels.

A complete cut-off of Russian gas to Europe by year-end and a further 30% drop in oil exports may lead to virtually zero European and U.S. growth next year, the IMF warned.

In commodities, U.S. crude was up around 2.38% to $97.24 per barrel and Brent was at $106.49, up 2% on the day.

Spot gold rose 0.1% to $1,718.30 an ounce and was trading in a tight range ahead of the Fed meeting.

“If the Fed hikes rates by 100 bps, this might reduce demand for precious metals. But if they stick to a 75 bps hike, then there is chance that gold could see a relief rally,” said Jim Wyckoff, senior analyst at Kitco Metals.

(Reporting by Sinéad Carew, Sujata Rao, Tom Westbrook, Ashitha Shivaprasad, Dhara Ranasinghe; Editing by Mark Potter, David Holmes and Jane Merriman)