Wall Street stocks rose slightly because strong US retail sales data indicated that shoppers were accepting higher inflation, but raised questions about whether the Federal Reserve can maintain interest rates at historically low levels.
The blue-chip S&P 500 index rose 0.3%, still close to historical highs. The technology-focused Nasdaq Composite Index rose 0.2%.
US retail sales in October increased by 1.7% month-on-month, an increase greater than economists expected. Earlier in the market, retailer Wal-Mart also raised its full-year sales and profit forecasts, and at the same time released quarterly results that exceeded analysts’ expectations.
Analysts said that the cheers of the retail industry before Christmas may strengthen market expectations for when the Fed will raise interest rates after the Fed limits interest rates to near zero in March 2020. Data released last week showed that consumer price inflation in the United States in October rose to a three-year high of 6.2% from the same period last year.
“The stronger the consumer outlook, the greater the inflationary pressure,” said Gergely Majoros, a member of the European fund manager Carmignac’s investment committee.
The U.S. dollar to euro exchange rate traded near a 16-month high, buying 0.88 euros, as investors prepared for the Fed to increase borrowing costs before the European Central Bank. Spot gold prices rose 0.3% to US$1,866, close to their highest level in five months.
Jorge Garayo, head of interest rates and inflation at Société Générale, said that most stock and bond markets believe that the inflation shock will subside after a short-term rate hike.
“We haven’t seen the peak yet,” he added. “The market tells us that it will be promoted in the next few years, but beyond that, it will not necessarily be deeply ingrained in the system.”
Some short-term market indicators that measure inflation expectations are at record highs. But the transaction price of the five-year five-year swap rate (how the price will rise in the long run) is about 2.6%, which is lower than the level of a month ago.
Gallayo said the stock market is focusing on the positive aspects of the economy’s rebound from the pandemic, because inflationary anxiety “has not spread” to long-term Treasury bonds, and their yields support companies that can borrow money for acquisitions or stock repurchases at low prices.
Although concerns about long-term inflation will depress prices and increase yields on benchmark 10-year US Treasury bonds, they have been relatively stable in recent weeks. On Tuesday, the index rose by 0.01 percentage point to 1.63%.
In contrast, the two-year U.S. Treasury yield that tracks short-term monetary policy expectations has climbed to 0.532% from about 0.4% before the release of the U.S. Consumer Price Report last Wednesday.
The Stoxx 600 Index in Europe rose 0.3%, setting a new record high, as energy stocks rose after a surge in natural gas prices, coupled with gains during the better-than-expected quarterly earnings season. The London FTSE 100 Index fell 0.2%.
In Asia, Hong Kong’s Hang Seng Index rose 1.3%, reflecting optimism about discussions between US President Joe Biden and Chinese leader Xi Jinping. At a rare virtual meeting, Biden urged Xi Jinping not to let the competition between the two economic powers and closely-connected trading partners “get into conflict”.
Among cryptocurrencies, the price of Bitcoin fell below $60,000 on Tuesday. New York fell 4.9% in early trading to $60,800. Bitcoin’s trading price last week was close to $69,000.