Dow jumps almost 750 points as stocks end higher, bond yields fall after reports Fed may shift to smaller rate hikes after November

How stock indexes traded

• The Dow Jones Industrial Average
  DJIA,
  +2.47%
  jumped 748.97 points, or 2.5%, to close at 31,082.56.

• The S&P 500
  SPX,
  +2.37%
  climbed 86.97 points, or 2.4%, to finish at 3,752.75.

• The Nasdaq Composite
  COMP,
  -0.81%
  gained 244.87 points, or 2.3%, to end at 10,859.72.

For the week, the Dow rose 4.9%, the S&P 500 gained 4.7% and the Nasdaq advanced 5.2%. All three indexes booked their biggest weekly percentage gains since June, according to Dow Jones Market Data.

What drove markets

U.S. stocks jumped Friday as investors considered a report from The Wall Street Journal, along with comments by San Francisco Fed president Mary Daly, suggesting that the Federal Reserve could potentially begin to back off slightly from its aggressive pace of interest-rate hikes late this year,

“We are starting to hear some rumblings that the Fed might be at least easing the aggressive nature of the magnitude of the rate hikes,” said Mona Mahajan, senior investment strategist at Edward Jones, by phone Friday. Markets had been “very firmly” pricing in a 75-basis point hike in December, as well as next month, she said

While the U.S. central bank appears set to again lift its benchmark rate by three-quarters of a percentage point at its policy meeting in early November, there may be some debate among Fed officials over whether to hike rates by 50 basis points in December.

“That is the first step in what we call the beginning of the end,” said Mahajan. “Over time we’d expect the pace of rate hikes to slow,” followed by a pause at some point, and then an assessment of where inflation and the economy are heading, she said.

Fed funds futures traders on Friday priced in a lower probability of a 75 basis-point hike in December, with odds falling to less than 50% from 75% before the report, according to the CME’s FedWatch tool.

Meanwhile, Treasury yields took a break from their recent climb, helping to take some of the pressure off stocks. The yield on the two-year Treasury note
TMUBMUSD02Y,
4.504%
fell 11.9 basis points Friday to 4.489%, while 10-year yields
TMUBMUSD10Y,
4.228%
dipped slightly more than one basis point to 4.212%, according to Dow Jones Market Data.

Ten-year and two-year yields had “gone up dramatically over the last couple days,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial, in a phone interview Friday. He worries that the stock market’s strong rally Friday may be an overreaction to “the assumption that the Fed might pause” its rate hikes.

All three major U.S. stock benchmarks scored their biggest weekly percentage gains since June as investors continued to assess companies’ earnings results from the third quarter. The Dow Jones Industrial Average rose 4.9%, the S&P 500 climbed 4.7% and the Nasdaq Composite advanced 5.2%.

“Keep in mind we’ve had decent earnings all week despite some one-off stories,” said Mahajan.

About 20% of companies in the S&P 500 index have reported earnings for the third quarter, according to a report Friday from John Butters, a senior earnings analyst at FactSet. His note shows that 72% of S&P 500 companies have reported a “positive” surprise in terms of earnings per share.

But shares of Snap Inc.
SNAP,
-28.08%
plunged Friday after a disappointing report.

Read: Snap’s ad woes turn some of Wall Street’s worst fears into reality, sending the internet sector on a tumble

Investors were also keeping an eye on the options market.

A team of options strategists from Goldman Sachs Group said in a note to clients that open interest in options linked to major equity indexes and exchange-traded funds tracking those indexes has soared this year, while interest in single-stock options has waned.

That left the market vulnerable to major intraday swings on Friday as options dealers scramble to hedge their exposure to options that are close to trading in the money.

“If market makers or other options traders who delta-hedge their positions are net long [at the money] options, expiration-related flow could have the effect of dampening stock prices,” the team said in a note to clients.

Companies in focus

• Snap Inc. SNAP shares plunged 28.1% after the company reported disappointing earnings and said it’s expecting flat revenue growth for the fourth quarter.

• A report that the U.S. could subject Elon Musk’s pending acquisition for Twitter Inc.
  TWTR,
  -4.86%
  to a national security review sent the company’s shares down 4.9%.

• Shares of American Express Co.
  AXP,
  -1.67%
  fell 1.7% after the company highlighted “mixed signals” in the U.S. economy, which helped to drive shares lower despite quarterly earnings beating Wall Street’s expectations.

• Intel Corp.
  INTC,
  +3.41%
  shares rose 3.4% after the company said it was planning on announcing “targeted” layoffs in November.

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