Bets firmed on Wednesday for a US Federal Reserve interest rate hike in December, boosting the dollar to a one-month high against a basket of currencies, and lifting financial stocks and Treasury yields.
A stronger-than-expected reading on durable goods orders also pulled Treasury yields higher, as it suggested inflation may be picking up. Republicans in the US Congress and the White House called for slashing tax rates on businesses and the wealthy as part of a new tax plan that offers few details about how to pay for tax cuts without expanding the federal deficit.
“While I think there is optimism, time will tell us how much of an impact [tax reform] will have on the market,” said Victor Jones, trading director at TD Ameritrade.
Bets on another interest rate hike at the Fed before the year ends firmed following Tuesday comments from Federal Reserve Chair Janet Yellen, who said the US central bank needs to continue gradual rate hikes despite broad uncertainty about the path of inflation.
Perceived chances of a hike at the Fed's December meeting rose to 83 per cent from 72 per cent on Monday, according to the CME Group's Fedwatch tool.
The hawkish rate sentiment helped fuel gains in S&P 500 financial shares, which gained 1.6 per cent. The S&P 500 tech sector rose 0.9 per cent, helped by an 8.1 per cent surge in shares of Micron Technology after the chipmaker's better-than-expected quarterly earnings report.
On Wall Street, the Dow Jones Industrial Average rose 18.95 points, or 0.1 per cent, to 22,303.27, the S&P 500 gained 5.21 points, or 0.2 per cent, to 2,502.05 and the Nasdaq Composite added 56.62 points, or 0.9 per cent, to 6,436.78.
“The renewed interest in technology, coupled with the likelihood of higher interest rates spurring an interest in financials, then the news on tax reform progressing, are all positive catalysts” for US equities, said Alan Lancz, president of inv-estment advisory firm Alan B. Lancz & Associates in Toledo, Ohio.
US small caps rallied on the expectation of lower taxes. The Russell 2000 index rose 1.6 per cent and was on track for its largest one-day gain in six weeks. The index also hit a record intraday high.
The pan-European FTSEurofirst 300 index rose 0.4 per cent and MSCI's gauge of stocks across the globe gained 0.1 per cent.
European banks rose two per cent and hit their highest in seven weeks. The dollar index rose 0.4 per cent, with the euro down 0.3 per cent to $1.1760.
"It really is an extension of the rally kicked off by the Fed last week," said Mazen Issa, senior FX strategist at TD Securities in New York, referring to the Fed's meeting where it signalled it may raise rates for a third time this year.
Data showed new orders for key US-made capital goods increased more than expected in August, pointing to strength in the economy despite an anticipated drag to growth from massive hurricanes.
Benchmark 10-year notes last fell 22/32 in price to yield 2.305 per cent, from 2.229 per cent late on Tuesday. Yields on the 2-year note rose to as high as 1.483 per cent, the highest since November 2008.
Brent crude futures slipped, while US West Texas Intermediate crude rose after stocks unexpectedly fell as Gulf Coast refiners came online after hurricane-related outages. US crude rose 0.39 per cent to $52.08 per barrel, while Brent was down 1.2 per cent.