US stocks rose and Treasury bond yields fell after statements from Federal Reserve officials supported speculation that the central bank is heading towards another pause in raising interest rates. Oil headed lower, after its largest rise since April.

The S&P 500 advanced for the third straight day, with some analysts also pointing to a recovery from oversold levels. Amazon stock rose amid fall sales to Prime subscribers. PepsiCo shares jumped due to its optimistic forecasts. An index of Chinese stocks listed in the United States added 3.1% after Bloomberg News reported that the Asian country is considering a new economic stimulus plan. European stocks rose the most since November 2022.

Lagarde is confident that inflation can be tamed

Treasuries rose, following a rise in global bonds on Monday, when cash trading was closed in the United States. 10-year Treasury yields fell 15 basis points to 4.65%. The swaps on the Fed's decisions show a 60% chance that the Fed will keep interest rates unchanged in December, compared to 60% odds of another rate increase by then, just one week ago. The dollar fell for the fifth day in a row, its longest losing streak since July.

In a week full of rhetoric from US central bank officials, Atlanta Federal Reserve Bank President Rafael Bostic said the policy is austerity enough to bring rates down to a 2% target. His counterpart in Minneapolis, Neel Kashkari, said he is not yet convinced that the rise in long-term Treasury bond yields will reduce the need to raise interest rates further, explaining that this depends on what drives the recent rise in borrowing costs.

Stable interest rates

Ben Jeffery of BMO Capital Markets said: Monetary policymakers have begun to acknowledge that the need for further rate hikes has decreased, given the tightening situation in financial conditions, largely after the recent rise in Treasury yields. This recognition may have reduced concern about the need for additional interest rate increases.

Investors will be watching for any hints in the minutes from the Fed's September meeting scheduled to be published on Wednesday that would suggest the Fed may not follow through on the latest rate hike indicated in its economic outlook, according to Anna Wong at Bloomberg Economics. She noted that two important upcoming economic indicators — the Consumer Price Index on Thursday and the University of Michigan Consumer Confidence Survey on Friday — may give a more definitive read.

Expectations that the Fed will raise interest rates following a huge increase in employment

This week's CPI risks are trending higher, reflecting dynamics in index components such as auto prices, said Lauren Goodwin, an economist and portfolio investment analyst at New York Life Investments. The upside surprise may result in more market acceptance on the downside, as investors are very concerned about rising energy prices.

While Goodwin said a further rate increase may still be on the table, she pointed to the fact that market financial conditions are tightening – reflecting higher risks to the real economy, government finances, and geopolitical developments.

High shekel

Global investors have been closely monitoring the geopolitical situation. President Joe Biden said that the United States will increase military aid to Israel after the surprise attack launched by the Palestinian Hamas movement.

The shekel regained its value at a time when the central bank dueled with short-selling speculators to contain the market repercussions from the Israeli conflict with the Islamic Resistance Movement (Hamas). The currency rose by 1% in the first half hour of trading on Tuesday and was little changed against the dollar.

The dollar rises amid the continued escalation between Israel and Palestine

Billionaire investor Paul Tudor Jones told CNBC that the current geopolitical environment is more threatening and challenging than he has ever seen, following the Hamas attack on Israel over the weekend, and he predicted that the United States will enter a recession early next year.

European gas prices have jumped, and Finland is on high alert as it suspects a gas pipeline leak in the Baltic Sea was due to an intentional act of destruction, raising concerns about the safety of Europe's energy infrastructure. Base metals fell amid new concerns about the real estate crisis in China.

Corporate news

  • Boeing said it delivered 27 commercial jets in September, the third straight month that shipments fell as manufacturing glitches put its annual target at risk.
  • General Motors has reached an agreement with its Canadian union, ending a strike that began about 13 hours ago at three plants in Ontario.
  • Louis Vuitton's (LVMH) sales growth declined in the third quarter as shoppers cut back on spending on high-end cognac and pricey handbags, further evidence that the post-pandemic luxury goods boom is waning.
  • Drugmaker Mallinckrodt has won court approval for a new debt reduction plan that will cut about $1 billion from the amount the company must pay to victims of America's opioid epidemic.