The stock market recovered at the conclusion of a wild week as traders decreased their bets on a larger Federal Reserve raise in July while scrutinizing a slew of Wall Street profits and looking for indications of capitulation that may pave the way for a more prolonged rebound.
With the expiration of approximately $1.9 trillion in options, American equities reversed a five-day decline. Following Citigroup's spectacular results, banks led gains. Swaps are pricing in about 75 basis points of Fed tightening this month, which is still an aggressive lift that has investors concerned about the likelihood of a recession but is down from a full point earlier this week. Bond yields and the dollar declined.
Economic indicators were mixed, but it was a dip in US consumer long-term inflation expectations to a one-year low that drew traders' attention. The reason for this is that policymakers may find some satisfaction in the fact that price pressures are not becoming entrenched.
Another reason for optimism is that two Fed officials expressed reservations about a full-point increase in July. Atlanta Fed President Raphael Bostic expressed concern over a large increase, and St. Louis Fed President James Bullard said he would delay judgement until the central bank met. He was cited earlier this week as suggesting he preferred a 75-basis-point increase.
