By Chuck Mikolajczak and Shashwat Chauhan
NEW YORK, Sept 30 (Reuters) - Nasdaq climbed on Wednesday and the S&P 500 dipped, but both indexes notched their second straight quarterly gains, as a softer-than-anticipated inflation reading cooled expectations that Federal Reserve policymakers 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 war and sky-high diesel fuel costs have stoked inflation worries and pushed US Treasury yields higher. Fed officials have indicated more rate hikes might be needed if price pressures fail to moderate after the central bank raised interest rates by 25 basis points this month.
Stocks lost ground heading into the closing bell, however, as the 2-year US Treasury note yield, which typically moves in step with Fed interest-rate expectations, turned slightly higher on the day. Longer-dated yields kept climbing 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 37%, according to CME's FedWatch Tool, 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 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 NOTCH QUARTERLY GAINS