January 17, 2022

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US stocks push higher as traders parse inflation data

Wall Street stocks rose, Treasuries were steady and the dollar weakened on Wednesday as traders looked past data showing US inflation had reached its highest in almost 40 years to focus on expectations price rises would soon peak.

The blue-chip S&P 500 index added 0.6 per cent, while its information technology sub-index gained 1.1 per cent. The technology-heavy Nasdaq Composite gained 0.9 per cent.

The dollar fell against sterling, the euro and the South African rand, with an index measuring the US currency against six others dropping by about 0.4 per cent.

Meanwhile, the yield on the benchmark 10-year US Treasury note, which moves inversely to its price, was flat at 1.74 per cent. The two-year yield, which closely tracks interest rate expectations, was also steady at 0.9 per cent.

US consumer prices rose 7 per cent in December from the same month last year, up from an annual rate of 6.8 per cent in November, data published by the labour department on Wednesday showed. Its rise in December was the sharpest since June 1982 but in line with analysts’ expectations.

Prices rose 0.5 per cent in December from November, slightly quicker than the 0.4 per cent Wall Street economists had forecast.

Testifying before the Senate banking committee on Tuesday, Federal Reserve chair Jay Powell pledged 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.”

Following the inflation report, traders continued to bet that the Fed would raise interest rates three or four times this year to about 1 per cent.

These calculations — 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 — have been cited by investors as supportive for equity markets.

Despite a tumultuous start to the year, where the S&P 500 index fell for five out of seven sessions and the Nasdaq Composite briefly fell into a correction, the S&P on Wednesday traded about 1.6 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?” he added. “We don’t think onerously so.”

Elsewhere in markets, Europe’s Stoxx 600 share index added 0.8 per cent and London’s FTSE 100 gained 0.9 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.

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