By Chuck Mikolajczak and Shashwat Chauhan
NEW YORK, Sept 30 (Reuters) - The S&P 500 and Nasdaq climbed on Wednesday, putting both on track to close out September with monthly gains, as a softer-than-anticipated inflation reading cooled expectations that Federal Reserve policy makers would hike rates in October.
The US Commerce Department reported the Personal Consumption Expenditures Price Index (PCE) increased 3.4% on an annual basis in August, below the 3.7% estimate of economists polled by Reuters.
Separately, the final reading of second-quarter GDP data was revised higher to a 2.2% annualized rate, thanks to solid consumer spending and investments helping to fuel the buildout of AI infrastructure.
The rising prices of crude oil from the US-Iran and increasing diesel fuel costs have stoked inflation worries and pushed US Treasury yields higher. Fed officials have also indicated more rate hikes might be needed if price pressures fail to moderate after the central bank raised interest rates by 25 basis points earlier this month.
The 2-year US Treasury note yield, which typically moves in step with interest rate expectations for the Fed, eased after the data, while longer-dated yields continued to climb on expectations for solid economic growth.
Market expectations for a rate hike of at least 25 basis points at the Fed's October meeting slumped to about 39%, according to CME's FedWatch Tool, down from roughly 51% in the prior session and nearly 71% a week ago.
Analysts also noted that recent methodology changes in calculating PCE by the Bureau of Economic Analysis also contributed to a lower reading.
"What the market is focused on is, is the economy continuing to grow and can it manage those higher interest rates? And I would say so far, the market has looked kind of like history that when the economy is growing, when profits are strong, when there's a secular theme, it will look past higher interest rates," said Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial in Troy, Michigan.
"However... if these higher rates stay at these elevated levels for longer, it's likely to start doing potentially more damage to the bond side of the portfolio, it could limit credit or available credit. And if investors start to feel those conditions could weigh on economic growth or weigh on corporate profitability over the next quarter or two, then I think you would see a very swift negative reaction in the market."
S&P, NASDAQ SET FOR MONTHLY GAINS
The Dow Jones Industrial Average fell 141.22 points, or 0.28%, to 51,208.70, the S&P 500 gained 27.74 points, or 0.36%, to 7,698.79 and the Nasdaq Composite gained 228.99 points, or 0.86%, to 27,026.53.
Both the S&P 500 and Nasdaq were on track for their second straight monthly advance, while the Dow was poised to snap a five-month streak of gains.
The S&P and Nasdaq were also poised for their second straight quarterly rise and fifth in the past six.
Most megacap and growth stocks ticked higher, with Amazon.com and Apple, Nvidia and Alphabet each rising more than 1% and in turn lifting the S&P 500 tech and communication services indexes as the best-performing sectors on the day.
PRIVATE PAYROLLS RISE IN SEPTEMBER
A reading on the labor market showed private employment rose by 90,000 jobs this month after a downwardly revised 36,000 in August, the ADP National Employment Report showed. The data was the latest in a string of reports on the job market this week that will culminate in Friday's key government payrolls report.
Among other movers, Hewlett Packard Enterprise climbed 5.3% after the AI server maker raised its long-term revenue growth forecast for its networking business and announced a $1.2 billion deal with Vultr.
Moderna slumped 5.7% after brokerage Citigroup downgraded its rating on the biotech company to "sell" from "neutral".
Declining issues outnumbered advancers by a 1.14-to-1 ratio on the NYSE and by a 1.02-to-1 ratio on the Nasdaq.
The S&P 500 posted 10 new 52-week highs and 20 new lows while the Nasdaq Composite recorded 44 new highs and 165 new lows.
(Reporting by Chuck Mikolajczak; additional reporting by Shashwat Chauhan and Tharuniyaa Lakshmi in Bengaluru; Editing by Devika Syamnath and David Gregorio)
