Wall Street rebounds after selloff on rate hike worries

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By Devik Jain and Sruthi Shankar

(Reuters) -U.S. stock indexes rose on Wednesday as investors scooped up beaten-down energy and technology shares following a sharp selloff in the previous session on worries about steep interest rate hikes by the Federal Reserve to curb surging prices.

Five of the 11 major S&P sectors were higher, led by a 3.2% jump in the energy sector as oil prices rebounded nearly 2% on supply concerns. [O/R]

Shares of technology and growth companies such as Amazon.com (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) Inc and Apple Inc (NASDAQ:AAPL) gained between 0.9% and 1.3% after leading declines on Tuesday.

The three major indexes on Tuesday posted their biggest one-day percentage declines since June 2020, as the consumer price report cemented bets that the U.S. central bank will go ahead with its third straight 75-basis-point increase in rates next week.

Wednesday's inflation data was more benign, showing producer prices declined for a second straight month in August as gasoline prices fell further, but was not enough for investors to reconsider the Fed's aggressive stance.

Markets are pricing in a 37% chance of a massive 100 bps increase by the Fed, and expects rates to peak at 4.34% by March 2023.

"It's plausible if not probable. At the same time, I believe and hope that the Fed is also going to be judicious with regard to how aggressive it is in light of the fact that the economy is slowing," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

"From here, it is a matter of whether we can get a ricochet bounce or what we're seeing now is just simply some sellers covering. It will be premature to say that the close we had after yesterday's carnage in equity markets was necessarily the bottom."

Stocks had rallied ahead of the inflation data with the S&P 500 managing to hold the 3,900 level, seen as a significant technical support by analysts, as easing commodity prices, especially oil, raised hopes the Fed would scale back its aggressive policy tightening.

Growing expectations of a more hawkish Fed are an unwanted development for a market already contending with worries that the central bank's efforts to tame inflation could tip the economy into a recession.

September, which is a seasonally weak period for markets, will also see the Fed ramp up the unwinding of its balance sheet to $95 billion per month, a move some investors fear may add to volatility in markets and weigh on the economy.

At 11:59 a.m. ET, the Dow Jones Industrial Average was up 89.14 points, or 0.29%, at 31,194.11, the S&P 500 was up 15.84 points, or 0.40%, at 3,948.53, and the Nasdaq Composite was up 83.29 points, or 0.72%, at 11,716.87.

The CBOE volatility index, also known as Wall Street's fear gauge, fell to 26.53 points, after hitting a two-month high in the previous session.

Meanwhile, focus was also on talks in Washington with freight railroad and union officials aimed at heading off a rail shutdown looming as early as Friday that could disrupt cargo shipments, impede food and fuel supplies and add to inflation woes.

Shares of U.S. railroad operators Norfolk Southern (NYSE:NSC), CSX Corp (NASDAQ:CSX) and Union Pacific Corp (NYSE:UNP) were down between 2.6% and 4.9%.

Starbucks Corp (NASDAQ:SBUX) jumped 6% after the coffee chain lifted its three-year profit and sales outlook.

Advancing issues outnumbered decliners by a 1.23-to-1 ratio on the NYSE and by a 1.22-to-1 ratio on the Nasdaq.

The S&P index recorded two new 52-week highs and 28 new lows, while the Nasdaq recorded 17 new highs and 163 new lows.