Wall Street edges higher after rout on rate hike worries

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By Ankika Biswas and Devik Jain

(Reuters) - U.S. stock indexes edged higher on Wednesday following a sharp selloff in the previous session after red-hot inflation data fanned worries about steep interest rate hikes by the Federal Reserve.

The three major indexes on Tuesday posted their biggest one-day percentage declines since June 2020, as the consumer price report cemented bets that the U.S. central bank will go ahead with its third straight 75-basis-point increase in rates next week.

Markets are also pricing in a 37% chance of a massive 100 bps increase by the Fed, and expects rates to peak at 4.34% by March 2023.

In the latest data, U.S. producer prices fell for the second straight month in August as the cost of gasoline declined further, resulting in the smallest annual increase in a year, which could allay fears of inflation becoming entrenched.

Excluding the volatile food, energy and trade services components, core producer prices rose by a higher-than-expected 7.3%. Focus will now be on monthly retail sales data on Thursday.

"After yesterday's selloff, just about anything would be welcome. And what we see is that the producer price index numbers came in pretty much as expected," said Hugh Johnson, chief economist of Hugh Johnson Economics in Albany, New York.

"It's fairly clear now that they're (Fed) going to raise interest rates by 75 basis points at the September meeting. The expectation is for a 50-basis-point rate hike in November and maybe another 25 in December."

Rate-sensitive shares of technology and growth companies such as Tesla (NASDAQ:TSLA) Inc and Apple Inc (NASDAQ:AAPL) rose 1.5% and 1.1%, respectively, after leading declines on Tuesday.

Seven of the 11 major S&P sectors rose in early trading, led by a 3.1% jump in the energy sector, while banks gained 0.5%. [US/]

Stocks had rallied ahead of the inflation data as easing commodity prices, especially oil, raised hopes the Fed would scale back its aggressive policy tightening even as policymakers reiterated their determination to bring inflation to their 2% target through rate hikes.

Growing expectations of a more hawkish Fed are an unwanted development for a market already contending with worries that the central bank's efforts to tame inflation could tip the economy into a recession.

September, which is a seasonally weak period for markets, will also see the Fed ramp up the unwinding of its balance sheet to $95 billion per month, a move some investors fear may add to volatility in markets and weigh on the economy.

"With the federal funds rate poised to be above 3% after next week's meeting and quantitative tightening running at full speed, Fed officials may finally start to feel that the pace of tightening can moderate in Q4 and beyond," Wells Fargo (NYSE:WFC) economists said.

"That said, there is a big difference between slowing the pace of tightening and a full-blown policy pivot."

At 9:51 a.m. ET, the Dow Jones Industrial Average was up 77.99 points, or 0.25%, at 31,182.96, the S&P 500 was up 12.09 points, or 0.31%, at 3,944.78, and the Nasdaq Composite was up 26.36 points, or 0.23%, at 11,659.93.

The CBOE volatility index, also known as Wall Street's fear gauge, rose to 27.18 points, inching closer to a two-month high hit on Tuesday.

Starbucks Corp (NASDAQ:SBUX) gained 4.5% after the coffee chain lifted its three-year profit and sales outlook.

Declining issues outnumbered advancers for a 1.08-to-1 ratio on the NYSE and a 1.20-to-1 ratio on the Nasdaq.

The S&P index recorded one new 52-week high and 17 new lows, while the Nasdaq recorded eight new highs and 101 new lows.