What drove markets?

U.S. stocks end sharply higher Friday, with all three major benchmarks booking big weekly gains.

The market now seems to be interpreting recent signs of slowing growth as a reason for the Federal Reserve to potentially have “a lighter touch” in its battle with inflation, said Dave Grecsek, managing director for investment strategy and research at Aspiriant, in a phone interview Friday. The thinking seems to be that maybe “we really can avoid a recession,” he said, with the Fed potentially needing to become less aggressive in hiking rates to bring down inflation as the economy slows.

Commodity prices have been falling recently, and judging by Fed funds futures, investors now see a lower peak in the path of the Fed’s benchmark interest-rate target.

Investors expect the Fed funds rate to peak at between 3.25% and 3.50% in December, down from 3.50% to 3.75% one week ago, according to the CME’s FedWatch tool. Furthermore, investors now expect the Fed to start cutting rates roughly one year from today.

“We’ve seen a two-week drop in commodity prices and now we are seeing Fed funds futures pricing in rate cuts out in 2023. The thing holding back the market was endless rate hikes, if we’ve found the terminal rate then stocks can make headway here,” said Mike Antonelli, a market strategist at Baird.

Read: ‘Cyclical growth’ could lead 10% ‘relief rally’ for S&P 500 this summer, says Stifel’s Barry Bannister

Meanwhile, the University of Michigan’s final reading on consumer sentiment showed expectations for inflation five to 10 years out had been revised lower to 3.1%, down from 3.3% in an earlier reading.

“Hopes that inflation is peaking and that the economy is still on solid footing has some investors confidently buying up heavily discounted stocks,” said Edward Moya, senior market analyst for the Americas at OANDA, in an emailed note Friday.

St. Louis Federal Reserve President James Bullard said Friday at a UBS conference in Switzerland the U.S. has a better chance of avoiding a recession if the central bank jacks up interest rates faster than usual to try to tame the hottest inflation in 40 years. He also said that recession talk is premature.

Read: Bullard Fed’s says rapid rise in interest rates now is the best way to avoid recession later

In economic data released Friday, a gauge of new-home sales for May came in stronger than expected. San Francisco Fed President Mary Daly on Friday joined others in signaling support for another big rate increase in July to slow inflation.

Some market strategists also attributed the bounce in stocks this week to technical factors after the main benchmarks tumbled last week. Meanwhile, the rebalancing of the Russell U.S. equity indexes after the market’s close Friday was expected to result in a surge of trading volume heading toward the closing bell.

Read: Don’t trust the stock-market bounce until S&P 500 is back above 3,800: analysts

The market is being driven by “this push and pull between inflation risk, recession risk and the Fed’s ability to navigate a path forward in terms of rate policy,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors, in a phone interview Friday. Investors are trying to work out “how quickly and how far” the Fed will need to go — or will “be able to go” — in terms of further tightening amid evidence the U.S. economy is slowing, he said.

Which companies were in focus?

FedEx Corp.
FDX,
+7.16%
shares rallied 7.2% after the company shared strong profit and sales guidance for the rest of the year, while reporting higher-than-expected quarterly profits.

Zendesk Inc.
ZEN,
+27.99%
shares surged 28% on reports the company is headed for a $10 billion acquisition.

Cruise line and resort stocks were up Friday, with Norwegian Cruise Line Holdings
NCLH,
+15.36%
soaring 15.4%, Carnival Corp.
CCL,
+12.44%
rising 12.4%, Royal Caribbean Group
RCL,
+15.77%
jumping 15.8%, Wynn Resorts Ltd.
WYNN,
+12.05%
gaining around 12% and MGM Resorts International
MGM,
+11.30%
surging 11.3%. The moves higher followed Carnival’s latest earnings report.

How did other assets fare?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.135%
rose 5.7 basis points Friday to 3.125%, but booked the largest weekly decline since May 20, 2022 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data. Yields and debt prices move in opposite directions.

The ICE U.S. Dollar Index
DXY,
-0.30%,
a measure of the greenback’s strength against a basket of rivals, was down 0.3%.

Bitcoin
BTCUSD,
+0.89%
was up 1.5% at $21,215.

In oil futures
CL.1,
+2.69%,
West Texas Intermediate crude for August delivery
CLQ22,
+2.69%
rose 3.2% to end at $107.62 a barrel. Prices based on the front month edged down by 0.3% for the week after settling Thursday at the lowest the lowest since May 10, according to Dow Jones Market Data.

Gold futures
GC00,
-0.09%
expiring in August added less than 0.1% to settle at $1,830.30 an ounce.

In European equities, the STOXX Europe 600
FXXP00,
+0.56%
closed 2.6% higher Friday for a weekly gain of 2.4%. London’s FTSE 100
UKX,
+2.68%
index rose 2.7% Friday, rising by the same percentage for the week.

In Asia, the Shanghai Composite ended 0.9% higher Friday, bringing its weekly gains to 1%. Hong Kong’s Hang Seng Index gained 2.1% Friday for a weekly rise of 3.1%. Japan’s Nikkei 225 index rose 1.2% Friday, booking a weekly gain of 2%.

—-Barbara Kollmeyer contributed to this report.