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Stocks extended gains on Monday after Federal Reserve Gov. Lael Brainard urged "prudence" in raising interest rates.
The S&P 500 was up 1.4%, the Dow Jones Industrial Average gained 1.2%, and the Nasdaq added 1.5%. The S&P 500 and Nasdaq were on track for their best day since July 8.
The U.S. economic recovery continues, though the central bank should be cautious in raising rates too quickly, Brainard said in a heavily scrutinized speech to The Chicago Council on Global Affairs. Brainard said soft inflation and economic uncertainty requires "prudence in the removal of policy accommodation."
"I believe this approach has served us well in recent months, helping to support continued gains in employment and progress on inflation," she said in prepared remarks. The cautious comments come as a relief to a market churning with uncertainty over the Fed's timeline.
"her remarks suggest that the Fed is more than comfortable remaining on the sidelines next week. The progress the economy is displaying is certainly encouraging but the characteristics of the 'new normal' emphasize that patience is warranted, and that the case the preemptive policy action is less compelling. If the Fed were considering a move next week, they would likely want to get the market closer to being onside and one would expect a less dovish assessment of the outlook.
In other Fed news, Atlanta Fed President Dennis Lockhart skirted a discussion of the Fed's interest rate plans in a speech on Monday morning, pointing to the highly sensitive nature of markets. "Financial markets seem to be very sensitive to remarks of Fed speakers at the moment," Lockhart noted on Monday. Lockhart did suggest a possible upcoming hike, though, arguing that economic data requires "serious discussion of a policy rate increase."
Kashkari eased concerns over a September hike, arguing that current economic issues cannot be fixed by monetary policy which lessened the need to act sooner. "There doesn't appear to be a huge urgency to do anything," Kashkari told CNBC. Kashkari, a non-voting member, said he wants to see an improvement in core inflation before action is taken.
One advocate for raising rates is JPMorgan CEO Jamie Dimon who called for a hike "sooner rather than later" in comments at the Economic Club of Washington. Dimon noted that "25 basis points is a drop in the bucket" and that the Fed should act now to avoid being behind the curve.
Wall Street ended Friday with its worst selloff since the Brexit decision in late June as worries peaked over when the Fed would next tighten monetary policy. Benchmark indexes also closed with their first move of more than 1% since July 8.
"After a very quiet summer, where stocks traded in a very narrow range for the past six weeks, Friday's decline jarred many into revisiting the assumptions about overall market conditions," Paul Nolte, financial analysts at Kingsview Asset Management, wrote in a note. "With so many conflicting signals from the economic data, central bank chatter and nervous investors, it is little wonder that the selling was as intense as it was on Friday. We'll see if cooler heads prevail this week."
Worries spiked after Boston Fed President Eric Rosengren joined the chorus of central bank officials backing a rate hike sooner than later. Rosengren, a voting member of the Federal Open Market Committee, said that the risks to the U.S. economy have diminished and that there are concerns of "growing imbalances in some asset classes" if the Fed does not step in to normalize rates.
Recent weak economic data, including a slowdown in services activity and a weaker-than-expected August jobs report, have undermined investor confidence in the U.S. economy. At the same time, central bank members have shifted their rhetoric to sound more hawkish, suggesting that the U.S. economy is near or at the levels that warrant another rate hike.
The chance of an interest rate hike in September fell to 15% on Monday, down from a 24% likelihood at the end of last week, according to CME Group fed funds futures. The majority of investors are banking on a rate hike in December. Chances of a move during the Fed's final meeting of the year sit at 48%.
Crude oil traded higher on Monday, paring some of the gains suffered on Friday. Oil declined at the end of last week as worries continued over the poor chances of a production freeze agreement when Organization of Petroleum Exporting Countries meet later this month. Domestic production was also a concern after a weekly reading on Friday showed another increase in the number of active oil rigs in the U.S.
A monthly report from OPEC out on Monday showed non-OPEC supply for next year revised to a higher level, an indication of ballooning supply in 2017. The organization also forecast demand for crude from OPEC to average 32.48 million barrels per day next year, down 530,000 bpd from its previous target.
West Texas Intermediate crude oil closed 0.9% to $46.29 a barrel on Monday.
"Oil prices joined [equities'] recovery despite an OPEC monthly report highlighting the resilience of non-OPEC production, suggesting ongoing hopes that a deal to limit OPEC production was at least still technically possible," Tim Evans, energy futures analyst at Citi, wrote in a report. "However, at the same time we note that a deal has yet to be reached, and some of the proposals in circulation such as a "pick-your-own-quota" option may not be effective in rebalancing the market."
In deal news Monday, HP (HPQ - Get Report) said it would pay $1.05 billion for Samsung Electronics' (SSNLF) printer unit in its largest ever printing-related purchase. HP, which split off from software company HPE Enterprise last fall, said the acquisition of Samsung Electronics' technology and its 6,500 or so patents, reflects a push to "disrupt" the outmoded copier segment by replacing devices with more advanced, multifunction printer, or MFP, technology. HP shares added 1.2%.
Canadian fertilizer giants Agrium and (AGU) Potash Corp. of Saskatchewan (POT) agreed to merge in an all-share deal that would create a company with market value of about $28 billion. Postash shareholders will hold 52% of the new company.
Horizon Pharma (HZNP - Get Report) agreed to purchase Raptor Pharmaceutical (RPTP) in an all-cash deal worth around $800 million. The offer of $9 a share values Raptor at a 21% premium to its Friday close. Horizon CEO Timothy Walbert said the deal broadens the company's ability to treat rare diseases.
Perrigo (PRGO - Get Report) rose after activist investor Starboard Value disclosed a 4.6% stake, worth nearly $600 million. The investment firm said that Perrigo's stock is currently at a "significant discount to fair value." The company also acknowledged "substantial opportunities" that could increase its value.
American Airlines (AAL) fell 2% after reporting a decline in traffic in August. The airline posted a 2.8% decline in revenue passenger miles to 20.4 billion, with drops seen in domestic, Atlantic and Latin American traffic. Available seat miles climbed 1.4%, while the passenger load factor fell to 82.9%. American Airlines anticipates a 3% to 5% decline in third-quarter revenue per available seat mile.