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New York, NY — Major U.S. stock indexes edged higher on Wednesday, putting the market on track to extend its rebound into a fourth straight day. Investors were encouraged by new economic data indicating a possible cooling in the red-hot job market and a slowdown in economic growth.

The Dow Jones Industrial Average rose 45 points, or 0.1%, to 31,875 in morning trading. The S&P 500 climbed 0.5% to 3,990, while the tech-heavy Nasdaq Composite jumped 0.7% to 11,955. The gains add to rallies of more than 1% for the indexes on Tuesday.

Stocks have rebounded this week after a rough stretch earlier in August that saw the S&P 500 come close to falling into a bear market. The turnaround comes as investors grow hopeful the Federal Reserve may be able to engineer a soft landing for the economy.

“This move goes back to a ‘bad news is good news’ environment, which tends to happen when investors worry about rates and Fed policy,” said Sonu Varghese, global macro strategist at Carson Group. “Any softness in economic data results in less upward pressure on yields, and that helps equities.”

Hiring Slowed in August, ADP Shows

A closely-watched report from payroll processor ADP showed U.S. companies added just 177,000 jobs in August, down sharply from 371,000 in July and below economist expectations for 200,000 jobs. The data provides one of the first signs the red-hot labor market may finally be cooling.

ADP’s figures come ahead of the more comprehensive August jobs report from the Labor Department due out Friday. Economists predict nonfarm payrolls likely increased by 300,000 last month, compared to a blockbuster gain of 528,000 in July.

“The labor market continues to show signs of slowing down,” said Nela Richardson, chief economist at ADP. “Our data suggests companies are no longer in hyper-replacement mode. That said, the job market remains robust, just not as hot as it was through the first half of 2022.”

An easing in hiring would be welcome news for the Fed as it battles the worst inflation in 40 years. The central bank has been aggressively raising interest rates to slow demand and curb rising prices. There are concerns the rapid pace of rate hikes could excessively cool the economy and lead to increased layoffs.

GDP Growth Downshifted in Spring

In another sign of weakening economic momentum, the government revised second-quarter gross domestic product growth down to 2.1% on an annualized basis, lower than the initial estimate of 2.4%.

The revision reflects downgrades to consumer spending and business inventories during the spring. The economy shrank 1.6% year-over-year in the first quarter. The downward revisions indicate growth was already slowing before the Fed started its monetary tightening campaign.

All eyes now turn to Fed Chair Jerome Powell’s speech on Friday at the Jackson Hole economic symposium for any new clues regarding rate hikes. The central bank is expected to deliver another oversized 0.75 percentage point rate increase at its September policy meeting. But investors are increasingly hopeful that signs of cooling inflation and slower growth could prompt Fed officials to scale back the pace of hikes or even pause them later this year.

Nvidia Boosts Chip Sector

Among individual stocks, Nvidia Corp. rose 2.5%, providing the biggest boost to the S&P 500 and the Nasdaq. The chipmaker closed at a record high on Tuesday after an analyst report said the stock is now relatively cheap compared to peers based on valuation. Other chip stocks also gained, driving the Philadelphia Semiconductor Index up 1.8%.

Apple Inc. climbed 1.2% ahead of its widely anticipated unveiling of the iPhone 14 at a product launch event on Sept. 12. Meanwhile, HP Inc. shares plunged 7% after the company’s quarterly revenue fell short of Wall Street targets amid ongoing supply chain difficulties.

In the bond market, the yield on the 10-year Treasury note slipped to 3.08% from 3.11% on Tuesday. Falling yields boost the appeal of riskier assets like stocks. The decline in Treasury yields this week has supported the stock market rebound.

Overseas, European shares closed higher Wednesday, picking up Wall Street’s positive cues. Asian markets also finished broadly higher. Japan’s Nikkei 225 rose 0.9% after data showed the country’s industrial output in June jumped more than 8% from the previous month.

China Mulls Stimulus Measures

Hong Kong’s Hang Seng index closed 1.4% higher following a report that Chinese policymakers are considering new stimulus measures such as infrastructure spending to bolster the world’s second-largest economy.

China’s economy is feeling the strain of repeated COVID-19 lockdowns in many cities and weak global demand. The official manufacturing PMI slipped into contraction territory in August, falling to 49.4 from 50.3 in July on a scale where readings below 50 indicate decline.

China’s economy grew just 0.4% in the second quarter, its slowest pace since the pandemic lockdowns of early 2020. Analysts expect third quarter GDP growth could slow further without more policy support. But Chinese authorities have been reluctant to unleash massive stimulus due to concerns over rising debt.

Fed Remains United on Restoring Price Stability

The Fed has acknowledged its rate hikes will inflict some economic “pain” through slower growth, job losses and market turmoil. But officials remain adamant they must crush inflation to maintain a healthy economy over the long run.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said at the last policy meeting in July.

Consumer price growth showed signs of moderating in July, slowing to 8.5% annually versus a four-decade high of 9.1% in June. But core inflation, which excludes food and energy, actually ticked up to 5.9% from 5.7%. This shows underlying inflationary pressures remain stubbornly persistent despite easing gas prices.

Powell has made clear the Fed’s credibility is at stake in tackling inflation after it undershot the 2% target for over a decade. He said there will be “some pain involved” to lower inflation back to target, but failing to act would mean “far greater pain.”

Most Fed officials have coalesced around raising rates another 50 or 75 basis points at upcoming meetings until inflation moves meaningfully lower. Futures traders see a 60% probability of a third straight 75 basis point hike when the Fed meets Sept. 20–21. Markets expect the central bank to lift its policy rate to a range of 3.75% to 4% by December, up from 2.25%-2.5% now.

Some economists believe the Fed may need to push rates above 4.5% to successfully rein in inflation, which risks recession. But hopes are growing that easing price pressures will allow the central bank to take a less aggressive policy stance later this year.

Markets could see big swings if upcoming economic reports fail to show the expected cooling of inflation and economic activity. Friday’s August jobs data will be in particular focus. A hotter-than-expected read on hiring could signal the Fed will need to keep raising rates aggressively, which could derail the recent stock rebound.

The S&P 500 remains down 10% in 2022 as higher rates dampen valuations. But stocks appear to have found their footing over the past two weeks. Further gains may rely on ongoing signs of peaking inflation that give the Fed leeway to moderate rate hikes without crashing growth. But until inflation declines decisively toward the 2% target, investors should brace for continued volatility.