US stocks rose on Tuesday even after Federal Reserve officials reiterated that interest rates would probably hover above 5 per cent for much of 2023.
Rising prices for healthcare and consumer cyclical stocks helped Wall Street’s blue-chip S&P 500 close 0.7 per cent higher. The tech-heavy Nasdaq Composite gained 1 per cent as investors shook off warnings on Monday from the presidents of the US central bank’s San Francisco and Atlanta branches that high inflation meant interest rates had further to climb.
Most Fed officials expect the fed funds rate to peak between 5 per cent and 5.25 per cent later this year, up from its current level at between 4.25 per cent and 4.5 per cent. Much of the debate among investors now revolves around whether the central bank will lift borrowing costs by 0.5 percentage points or 0.25 percentage points when it meets at the end of this month.
Arguments for either move depend to a large extent on December’s consumer price index data, which will be published on Thursday. Market participants surveyed by Refinitiv expect prices to have risen 6.5 per cent year on year in the final month of 2022, down from an increase of 7.1 per cent in November.
“A cool surprise will tilt the expectations to a 25 [basis point] hike and we’ll get some equity upside,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Hot data will result in 50 [basis point] expectations and significant downside. The market is not symmetrically primed.”
Tuesday’s moves in equity markets came after the US National Federation of Independent Business’s Small Business Optimism index declined by more than expected in December, suggesting the Fed’s aggressive monetary tightening campaign is squeezing economic activity.
“Inflation and difficulties finding qualified workers remain the issues most problematic” for small business, said Joshua Shapiro, chief US economist at MFR.
US government bonds have rallied since the start of the year on the back of signs of slowing wage growth in the world’s biggest economy — a critical measure of pressure on prices for Fed officials who insist their approach to monetary policy will be “completely data-dependent”.
On Tuesday, however, the yield on the two-year Treasury note, which is sensitive to interest rate expectations, rose 0.05 percentage points to 4.25 per cent.
The 10-year Treasury yield, seen as a proxy for borrowing costs around the world, added 0.1 percentage points to 3.62 per cent. Bond yields move inversely to prices.
A measure of the dollar’s strength against a basket of six peers gained 0.3 per cent on the day. The euro hovered around its highest levels against the greenback since June, at $1.073.
Elsewhere in equity markets, Europe’s Stoxx 600 shed 0.6 per cent, eating into strong gains since the beginning of January, while London’s FTSE 100 fell 0.4 per cent and Germany’s Dax lost 0.1 per cent.
In Asia, Hong Kong’s Hang Seng index fell 0.3 per cent and China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks added 0.1 per cent.
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