By Sinéad Carew and Shashwat Chauhan
(Reuters) -Wall Street’s major indexes closed higher on Friday as investors focused on the likelihood of a bigger rate cut from the Federal Reserve next week, with rate-sensitive small-cap stocks outperforming.
Bets on the size of the Fed’s rate cut were volatile and were about flat late Friday. Expectations for a 50 basis point cut rose to 49% from 28% on Thursday, according to CME’s FedWatch Tool, which showed a 51% probability of a 25 basis point cut.
Former New York Fed President Bill Dudley said late Thursday that there was a strong case for a 50 basis point rate cut.
Reports in the Wall Street Journal and other media early Thursday said the Fed faced a difficult decision on how much to ease interest rates on September 18.
“There’s just rumors bubbling up again that the discussion within the Fed leaves 50 basis points on the table,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors, Southfield, Michigan.
In contrast, Thursday’s bets that the Fed would opt for a smaller cut of 25 basis points were confirmed after news of slightly higher producer prices and Wednesday’s consumer price data.
While renewed hopes for a bigger cut boosted large-cap indexes on Friday, the optimism seemed most evident in the Russell 2000 small-cap index (), which fell 2.5% during the day and rose 4.4%.
Smaller companies are more sensitive to interest rate changes because they are more dependent on borrowed money and loans with variable interest rates.
Baird argued that stocks showed optimism among investors that a 50 basis point cut would not signal a coming recession.
“If investors were to look at this and say they need to move faster because they are behind the curve, risky assets like small caps would not see an increase,” Baird said. “You’re seeing some of the riskier areas of the stock market moving forward quite strongly today.”
Jason Pride, head of investment strategy and research at Glenmede in Philadelphia, said Friday’s gains likely stemmed from Dudley’s comment on the case for a 50 basis point cut.
Also on Friday, a survey showed that US consumer confidence improved in September as inflation eased, although Americans remained cautious ahead of November’s presidential election.
They rose 297.01 points, or 0.72%, to 41,393.78, they rose 30.26 points, or 0.54%, to 5,626.02 and they rose 114.30 points, or 0.65%, to 17,683.98.
All three major U.S. benchmark indexes closed near their highest levels in about two weeks and posted solid weekly gains.
For the week, the S&P 500 rose 4.02% and the Nasdaq rose 5.95%, both posting their biggest weekly percentage gains since early November. The Dow Jones added 2.60% this week.
Adobe (NASDAQ:) ended 8.5% lower after the Photoshop maker forecast fourth-quarter earnings below expectations.
And shares of Boeing (NYSE:) fell 3.7% after factory workers on the US West Coast walked off their jobs early Friday after overwhelmingly rejecting a contract deal.
Chinese e-commerce company PDD Holdings fell 2.4% after the Biden administration said it would take steps to limit low-value shipments entering the U.S. duty-free below the “de minimis” threshold of $800.
Shares of Uber (NYSE:) rose 6.4% after the ride-hailing platform said it would bring autonomous rides to Austin, Texas and Atlanta in partnership with Alphabet’s (NASDAQ:) Waymo.
On the NYSE, there were 653 new highs and 27 new lows.
On the Nasdaq, 3,275 stocks rose and 1,026 fell as advancing issues outnumbered declining stocks by a 3.19-to-1 ratio. The S&P 500 posted 60 new 52-week highs and one new low, while the Nasdaq Composite posted 116 recorded new highs and 54 new lows.
On US stock exchanges, 10.15 billion shares changed hands, compared to the average of 10.78 billion over the past twenty sessions.
