Wall Street stocks wavered on Monday, after hitting a record high last week as investors awaited central banks’ latest responses to months of above-target inflation.
The blue-chip S&P 500 share index was down 0.1 per cent in New York mid-afternoon dealings while the technology-focused Nasdaq Composite gained 0.2 per cent.
Europe’s Stoxx 600 meanwhile extended an all-time high reached on Friday, closing up 0.7 per cent.
The US Federal Reserve is due to meet on Wednesday. The central bank may update investors on whether it still views surging prices as a temporary effect of pandemic-related supply chain and labour market disruptions, or if it is moving towards a cycle of interest rate rises.
US consumer price inflation has run at 5 per cent or more for five months, sparking bets of interest rate rises across government bond markets. The S&P and the Nasdaq closed out their best month of the year on Friday, however, as strong corporate earnings dispelled fears that spiralling costs of commodities and industrial materials had hurt companies’ profitability.
That marks a contrast from when global stock markets dropped back in September, as investors feared that price pressures caused by supply chain glitches would harm earnings.
“Equity markets are responding to the fact investors now see price inflation as being good for earnings,” said Savvas Savouri, chief economist at hedge fund Toscafund, adding that “we’ve seen far fewer profit warnings than many had expected. Companies can keep pace with costs and raise prices into strong demand.”
According to FactSet data, 82 per cent of S&P 500 companies that have reported quarterly earnings so far have beaten analysts’ forecasts.
The Fed is expected on Wednesday to announce a reduction of its $120bn a month of bond purchases that have eased financial conditions through the pandemic era.
Meanwhile, traders are anticipating that the Bank of England could begin to raise rates from their current record low at its meeting on Thursday. Central banks in Norway, Poland and Australia also meet this week.
“Fed officials will almost certainly announce the start of tapering,” strategists at TD Securities said. But they also predicted that the world’s most influential central bank would not signal the start of an interest rate “lift-off” and would continue to characterise elevated inflation as a transitory effect of pandemic-driven disruptions to supply chains and the jobs market.
“The bond markets are beginning to overrun the policymakers and price in a much faster pace of tightening,” Jefferies strategist Sean Darby said.
The yield on the two-year Treasury note, which moves inversely to its price, rose 0.03 percentage points to 0.521 per cent, pushing it back towards the one-and-a-half-year high it hit last week.
The yield on the benchmark 10-year note, which influences borrowing costs worldwide, rose 0.03 percentage points to 1.59 per cent as rate increase expectations lessened the appeal of holding fixed interest-paying securities.
Meanwhile, selling of Italian bonds in the wake of last week’s European Central Bank meeting took the spread between Italian and German 10-year yields to 1.37 percentage points on Monday — its highest level in a year. This spread is a key measure of the risk linked to holding Italian government debt.
Asian stock markets were mixed on Monday. Tokyo’s Topix closed 2.2 per cent higher after the ruling Liberal Democratic party held its majority in Sunday’s parliamentary election, cementing hopes of more government stimulus spending to counteract the economic shocks of Covid-19.
Hong Kong’s Hang Seng index closed down 0.9 per cent as recent Covid outbreaks in China weighed on business sentiment. China’s official purchasing managers’ index, which collates executives’ responses to questions on topics ranging from hiring plans to new orders, dropped to a reading of 50.8 in October from 51.7 the previous month, just above the 50 watermark that separates expansion from contraction.
Brent crude, the oil benchmark, rose 1.1 per cent to $84.61 a barrel.