Global stock and government bond prices picked up for a second consecutive day on Wednesday, as investors looked past data showing US inflation had reached its highest level in nearly 40 years to focus on expectations that price rises would soon peak.
Wall Street’s blue-chip S&P 500 closed 0.3 per cent higher, while the tech-heavy Nasdaq Composite climbed 0.2 per cent.
US equity markets, particularly tech stocks, have had a bruising start to the year amid concerns about the impact of high inflation and rising interest rates.
Data released on Wednesday morning showed consumer prices rose 7 per cent year on year in December. However, the news had little impact on investors who had been reassured by comments from Federal Reserve chair Jay Powell earlier in the week.
Powell told the US Senate banking committee on Tuesday that the central bank would tackle high inflation and forecast that supply chain bottlenecks caused by pandemic disruptions would ease this year.
“We continue to expect significant slowing in the year ahead as the boosts from reopening and fiscal stimulus fade and Covid-related supply constraints eventually ease,” strategists at TD Securities wrote in a note to clients. “But, for now, the data remain quite strong.”
The yield on the benchmark 10-year Treasury note, which falls when prices rise, was unchanged at 1.73 per cent. Instead, investors sold out of policy-sensitive two-year notes, sending the yield up 0.02 percentage points to 0.91 per cent.
“The willingness of rates to ignore decades-high [inflation] figures is hinting . . . that the Fed’s threshold for inflation to justify rate normalisation has long-since been met and therefore any upside surprise is a shoulder-shruggable event,” said Ian Lyngen, a strategist at BMO Capital Markets.
Following Wednesday’s inflation report, traders continued to bet that the Fed would raise interest rates between three and four times this year, to about 1 per cent.
These calculations are implied by swaps markets and predicated on a widely held view that current high rates of inflation will fade out as global supply chain bottlenecks caused by the economic disruption of coronavirus lockdowns start to unwind. They have been cited by investors as supportive for equity markets.
Despite a tumultuous start to the year, when the S&P 500 index fell in five out of seven sessions and the Nasdaq Composite briefly entered a correction, by the close of Wednesday’s session the S&P was just 1.9 per cent below its all-time high.
“Yes, there is a removal of accommodation coming,” said Tim Graf, macro strategist at State Street, speaking before the inflation data. “But does that make a meaningful difference to the financing environment for households and corporations? We don’t think onerously so.”
The increased optimism in the US followed similarly positive trading in Europe and Asia. The Europe-wide Stoxx 600 share index added 0.6 per cent and London’s FTSE 100 gained 0.8 per cent. Hong Kong’s Hang Seng index closed 2.8 per cent higher, with its technology sub-index achieving its biggest daily gain since October.
The dollar index, which measures the US currency against a basket of peers, fell 0.7 per cent.
US stocks push higher as traders parse inflation data
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