Wall Street stock markets rose and US government bonds steadied as data showed that an anticipated jolt of inflation in the world’s largest economy had not yet begun.
As the US House of Representatives prepared to pass President Joe Biden’s $1.9tn coronavirus relief package, which has heightened inflation expectations and piled pressure on central banks to recalibrate ultra-loose monetary policies, data showed consumer prices rose 1.7 per cent in February from the same month in 2020, in line with economists’ expectations. The gauge had risen 1.4 per cent in January.
The underlying measure of price rises, which strips out food and energy, rose 1.3 per cent on a year-on-year basis, down 0.1 percentage point compared with the previous month.
Wall Street’s blue-chip S&P 500 share index was up 0.6 per cent at lunchtime in New York while the Nasdaq Composite gained 0.4 per cent, a day after the technology-focused benchmark’s biggest rise since November.
The yield on the 10-year US Treasury, which has climbed from about 0.9 per cent at the start of February, fell 0.03 percentage points to 1.52 per cent.
Inflation, which makes bonds less attractive as it erodes the value of their fixed-interest payments, is expected to climb further in March and April in the US, partly because of a marked economic rebound after the pandemic sharply reduced inflation a year ago.
It was “unlikely that the big inflation moment” would have come on Wednesday, said Savvas Savouri, chief economist and partner at UK hedge fund Toscafund,
“It is coming in the months ahead,” he added, as the reopening of the economy combined with heavy stimulus spending meant there was “going to be a big inflationary shock as too much money chases too few goods and services”.
Investors also held back from making bets on government bonds ahead of a US Treasury department auction on Wednesday of $38bn of 10-year notes, followed by a sale of $24bn in 30-year bonds on Thursday. Some analysts have expressed concern over a lack of demand for incoming supply in the world’s largest sovereign debt market.
This uncertainty has also clouded the outlook for the US dollar, which influences a range of other financial assets.
Mimi Rushton, Barclays’ co-head of global forex sales, said her clients were “very clearly” moving money out of emerging market assets and back into dollars. Rising Treasury yields, the benchmark for global debt costs, would make loans more expensive for developing nations that borrow in the US currency.
On the other hand, noted Rushton, Federal Reserve chairman Jay Powell had firmly signalled that the central bank had no plans to withdraw its $120bn-plus of monthly asset purchases that had kept financial conditions loose throughout the pandemic.
“The market is by and large ignoring what the Fed is telling it and the question is how long this will go on,” said Rushton.
The dollar index, which measures the currency against a basket of peers, traded flat after the inflation data. The euro was also steady, purchasing $1.1907, as investors awaited clues from the European Central Bank on Thursday about how its policymakers planned to deal with rising bond yields in the eurozone.
In Europe, the regional Stoxx 600 equity index closed up 0.4 per cent, while the UK’s FTSE 100 lost 0.1 per cent and the CAC 40 in France climbed 1.1 per cent.