Financials lift Wall Street, but rate worry caps gains

Wall Street advanced on Wednesday and the Dow Jones Industrial Average closed at a record for a second day, after US economic data fueled a rise in Treasury yields, lifting financial stocks.

The ADP National Employment Report showed private payrolls jumped by 230 000 jobs in September, the largest gain since February. A report from the Institute for Supply Management showed services sector activity hit a 21-year high in September.

The data fed expectations for a US Federal Reserve interest rate hike in December. The yield on the 10-year US Treasury note touched its highest level in over seven years at 3.179% and the two-year yield hit its highest in more than a decade.

Rising yields boosted financial shares, putting the S&P 500 within striking distance of a record. Financials were also aided by signs Italy would cut its budget deficit and lower its debt, easing a concern that had pressured global stock markets.

Financials, which have underperformed the broader market this year, rose 0.81%, their biggest daily gain since September 19.

Still, major indexes closed well off their earlier highs as the data and recent comments from Fed officials raised concerns the central bank may hike rates too aggressively.

“Just the recognition of the Fed saying the economy is good, that means they are not going to slow down any time soon the rate of rate increases,” said Mike Baele at managing director at US Bank Private Client Wealth Management in Portland, Oregon.

“If we were to think about risks to risk assets, rate increases would certainly be at the top of that list. The old adage is the Fed raises rates until something breaks.”

The Dow Jones Industrial Average rose 54.45 points, or 0.2%, to 26 828.39, the S&P 500 gained 2.08 points, or 0.07%, to 2 925.51 and the Nasdaq Composite added 25.54 points, or 0.32%, to 8 025.09.

Traders now see a 79.7% chance of a 25 basis point hike at the December meeting of the Fed, up from 78.5% a day ago, according to CME’s FedWatch tool.

Utilities, off 1.23% and real estate , down 0.98%, were leading decliners, as higher bond yields made shares of high-dividend paying companies less attractive.

General Motors rose 2.1% after Honda Motor said it would invest $2 billion over 12 years in the US carmaker’s Cruise self-driving unit.

Michael Kors rose 3.0% after Citi upgraded the stock on expectations its recent purchase of Italian fashion house Versace would boost performance.

Declining issues outnumbered advancing ones on the NYSE by a 1.04-to-1 ratio; on Nasdaq, a 1.63-to-1 ratio favored advancers.

The S&P 500 posted 29 new 52-week highs and 14 new lows; the Nasdaq Composite recorded 38 new highs and 67 new lows.