S&P 500, Nasdaq book 3rd day of gains after Fed minutes point to another big rate increase this month to tackle inflation

What drove markets

Stocks added to a string of gains after minutes of the Federal Reserve’s June meeting released on Wednesday reiterated a resolve by Fed officials to act aggressively through interest rate hikes given growing concerns about the possibility of inflation becoming entrenched in the economy.

Fed officials “recognized that policy firming could slow the pace of economic growth for a time,” the minutes said. They also indicated another large rate hike, of 50 basis points or 75 basis points, likely would be approved later this month.

“These minutes are reflecting the almost extreme concern, or panicky situation, the Fed has found itself in,” said Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research, by phone.

“But in three weeks, a lot has changed,” she said, pointing to the retreat in U.S. oil prices to below $100 a barrel, signs of slowing growth and the climbing U.S. dollar, which could reflect recession fears. “It seems like a very different world from three weeks ago.”

Evidence of a slower economic growth already has begun to show as the Fed works to dramatically increase interest rates and reduce its balance sheet to fortify its battle against high inflation.

An ISM barometer of business conditions at service-oriented companies, such as restaurants, hotels and retailers fell slightly to 55.3% in June and hit the lowest level in two years. A reading above 50% indicates an expansion in activity.

“Talk matters,” said Gaurav Mallik, chief investment strategist at State Street Global Advisors, about the impact of tougher tones lately from Fed officials and other central bankers about the need for tighter monetary policies to tamp down high costs of living around the world.

“Our expectation is that demand destruction is already on the way,” Mallik said, by phone. While he views higher interest rates as necessary to help bring inflation back down to the Fed’s 2% target, he also worries that a “global tsunami” of monetary tightening could risk triggering a deeper U.S. recession.

Treasury bonds yields inverted again Wednesday afternoon, with the 2-year yield trading above the 10-year yield.

“Recently a lot of the discussion has really been around this recession narrative, especially with the yield curve inverting for the third time this year,” said Lindsey Bell, chief markets and money strategist at Ally, by phone. “The market just remains on edge because there’s just a significant amount of uncertainty.”

BlackRock’s Bob Miller, head of America Fundamental Fixed Income, said the Fed appears to have “a narrow path to tread” as it works to lower inflation without “breaking the economic recovery,” in emailed comments.

Earlier, Japan’s Nikkei 225
NIK,
-1.20%
lost 1.2% and China’s Shanghai Composite
SHCOMP,
-1.43%
shed 1.4% after it emerged Beijing was once again tacking COVID-19 outbreaks in several regions of the country. But European stocks rallied, with the STOXX Europe 600 Index
FXXP00,
+0.54%
closing 1.7% higher and London’s FTSE 100 Index
UKX,
+1.17%
gaining 1.2%.

Companies in focus

• Microsoft Corp.
  MSFT,
  +1.28%
  shares rose 1.3% even after the AP reported that its acquisition of game publisher Activision Blizzard
  ATVI,
  -0.63%
  will face antitrust scrutiny in the U.K., after regulators said Wednesday they opened an initial inquiry into the $69 billion deal.

• Target Corp.
  TGT,
  -0.62%
  shares tell 0.6% after it announced a fresh lineup of perks and promotions for the back-to-school season at a time when parents and teachers are feeling the squeeze of inflation.

• Kornit Digital Ltd.
  KRNT,
  -25.67%
  shares plunged 25.7% Wednesday after the company cut its forecast for the second quarter Tuesday and suggested the third quarter isn’t expected to be much better.

• Shares of Rivian Automotive Inc.
  RIVN,
  +10.42%
   rallied 10.4% Wednesday, after the electric vehicle maker reported second-quarter deliveries and production that was “in line with the company’s expectations.”

• Uber
  UBER,
  -4.53%
  and DoorDash
  DASH,
  -7.40%
  fell after Amazon
  AMZN,
  +0.73%
   struck a partnership with Grubhub, a unit of Just Eat Takeaway
  JET,
  +13.77%

• Tesla
  TSLA,
  -0.57%
  shares fell 0.6% even though the electric vehicle maker sold about 78,000 vehicles produced in China in June, up 142% from May, according to preliminary data released Wednesday by the China Passenger Car Association.

Other markets

• Crude prices closed in a bear market, with West Texas Intermediate crude oil futures
  CL.1,
  -1.12%

  CLQ22,
  -1.12%
  down 1% to settle at $98.53 a barrel.

• Gold futures
  GC00,
  -1.47%
  fell about 1.6% to settle at $1,736.50 an ounce, booking their longest losing streak since March 2019. The yellow metal can struggle when the dollar rallies.

• Bitcoin
  BTCUSD,
  -0.75%
  was off 0.5% to trade under $20,300.

—Jamie Chisholm contributed reporting to this article