Global stocks rose sharply early Friday as investors took heart in remarks by Federal Reserve Board Chair Janet L. Yellen that the U.S. economy was strong enough to weather a rate hike before the end of the year.
U.S. markets opened higher, following futures trading that predicted a sharp rise in the Dow Jones industrial average overnight. The blue-chip Dow was up 199.87 points, or 1.2%, in the first few minutes after the market’s open, before moderating somewhat.
The broader Standard & Poor’s 500 rose 17.88, or 0.8%, while the tech-heavy Nasdaq was up more than 1%, or 49.93 points.
The early gains on U.S. markets followed even stronger surges in Europe, led by France’s CAC 40, which rose 3.5% in late trading Friday, while the London’s FTSE 100 and the Germany’s DAX were both up more than 2%.
In a major speech at the University of Massachusetts on Thursday, Yellen laid out a detailed argument for raising short-term interest rates by the end of the year. She cited, among other things, “considerable improvement in labor market conditions” that included an unemployment rate of 5.1%, which she said was only slightly above what many members of the Fed’s rate-setting panel believe is “its longer-run normal level.”
She said that inflation, while currently running below the Fed’s 2% target, is likely to rise, necessitating a rate hike.
Global markets were battered in August following wild dives on China’s main stock markets that sparked fears that an unraveling of the Chinese economy might hamper growth in the rest of the world. The Dow, even with Friday morning’s gains, remains down more than 8% for the year.
Normally, stock markets favor low interest rates, which make equities more attractive relative to other investments, such as bonds. But with investors fearing the possibility of global deflation, markets greeted the Fed’s decision to hold off on a rate hike at its last meeting in September as a bearish lack of confidence in the U.S. economy.
On the heels of Yellen’s speech Thursday, the Commerce Department on Friday reported that the economy performed better in the second quarter than earlier estimated, growing at a strong 3.9% annual rate.
The new data showed economic growth rebounded sharply from weak 0.6% annualized growth in the first quarter, fueled by increases in consumer spending, exports, business investment and government expenditures.