Market

Global stocks drift higher on back of US inflation data

Newsletter: Unhedged

Wall Street stock markets rose despite data showing US consumer prices increased more than 5 per cent in the year to August, as investors banked on the Federal Reserve maintaining its pandemic-driven loose monetary policies.

The blue-chip S&P 500 index opened 0.4 per cent higher. The technology-focused Nasdaq Composite rose by the same amount.

The yield on the 10-year US Treasury note, which moves inversely to its price and is highly sensitive to future interest rate expectations, fell by 0.02 percentage points to 1.307 per cent.

Headline US consumer prices rose by 5.3 per cent in August compared with the same time last year. This was in line with the median forecast of economists polled by Bloomberg, however, and slightly below the 5.4 per cent headline inflation rate recorded in July.

Federal Reserve officials do not expect to raise interest rates from their current record low level until 2023. Jay Powell, chair of the central bank, has argued that higher inflation is caused by temporary factors related to the pandemic, such as computer chip shortages and shipping disruptions.

Traders’ longer term inflation expectations fell slightly after Tuesday’s inflation release, which showed that price rises for used vehicles and rents moderated between July and August.

A market rate measuring expectations for inflation in the five-year period starting in five years fell to 2.55 per cent from 2.56 per cent.

“High inflation should prove temporary because it is a supply-chain issue,” said Aaron Anderson, senior vice-president of research at Fisher Investments.

The Stoxx Europe 600 index added 0.2 per cent, reversing a slight fall earlier in the session and remaining close to a record high driven by the region’s economic recovery from the coronavirus crisis. London’s FTSE 100 traded flat.

Brent crude, the oil benchmark, rose 0.8 per cent to $74.05 a barrel, heading for its third consecutive day of gains.

Some investors remain fearful of US inflation staying elevated as a rebound in economic growth from 2020’s lows levels off.

“I’m leaning towards inflation becoming more permanent than many investors believe,” said Kasper Elmgreen, head of equities at Amundi, citing wage increases as US employers struggle to fill positions.

“We are then getting into a stagflationary environment, potentially,” Elmgreen said,

A Bank of America survey of 258 asset managers found that a net 13 per cent expect global economic growth to rise, the lowest amount since April 2020. But half the respondents still believed stock markets would go higher.

“Growth expectations are saying equity allocations should fall,” BofA strategists wrote in a note accompanying the survey.

The dollar index, which measures the US currency against six others, fell by 0.3 per cent as predictions of the next interest rate rise moved further out.

Sterling moved 0.4 per cent higher against the dollar to purchase $1.3889 as traders switched their rate rise bets from the US to the other side of the Atlantic.

On Tuesday, job vacancy data showed UK employers were searching for more than 1m new staff, in an indication wages could rise.

The BoE has also signalled that it would raise interest rates before reducing its holdings of government and corporate bonds, while the Fed is seen as most likely to first cut its $120bn a month of bond purchases that have boosted lending and spending through the pandemic.

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