U.S. stocks rose Tuesday even after Federal Reserve officials reiterated that interest rates are likely to hover above 5% for much of 2023.
Rising prices for cyclical healthcare and consumer stocks helped from Wall Street the blue-chip S&P 500 closed up 0.7%. The tech-heavy Nasdaq Composite gained 1% as investors on Monday ignored warnings from the presidents of the US central bank’s San Francisco and Atlanta branches that high inflation meant interest rates were set higher to climb.
More fed officials expect the federal funds rate to peak between 5% and 5.25% later this year, up from its current level of between 4.25% and 4.5%. Much of the debate among investors now revolves around whether the central bank will raise borrowing costs by 0.5 percentage points or 0.25 percentage points at its meeting at the end of this month.
The case for either move largely hinges on December’s Consumer Price Index data, which will be released on Thursday. Market participants surveyed by Refinitiv expect prices to have risen 6.5% year-on-year in the last month of 2022, compared to a 7.1% increase in November.
“A good surprise will tip expectations towards a 25 [basis point] go up and we’ll get stocks up,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Hot data will result in 50 [basis point] expectations and a significant inconvenience. The market is not symmetrically primed.
Tuesday’s moves in stock markets came after the American National Federation of Independent Businesses’ Small Business Optimism Index fell more than expected in December, suggesting the Fed’s aggressive monetary tightening campaign is squeezing the ‘economic activity.
“Inflation and difficulty finding skilled workers remain the most problematic issues” for small businesses, said Joshua Shapiro, chief US economist at MFR.
US government bonds have rallied since the start of the year amid signs of slowing wage growth in the world’s largest economy – a critical measure of price pressure for Fed officials who insist that their approach to monetary policy will be “completely data driven”. ”.
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%.
The 10-year Treasury yield, considered an indicator of borrowing costs around the world, added 0.1 percentage point to 3.62%. Bond yields move inversely to prices.
A measure of dollar strength against a basket of six peers gained 0.3% on the day. The euro hovered around its highest levels against the greenback since June, at $1.073.
Elsewhere in the stock markets, Europe’s Stoxx 600 lost 0.6%, munching strong gains since early January, while London’s FTSE 100 fell 0.4% and Germany’s Dax 0.1%.
In Asia, Hong Kong’s Hang Seng index fell 0.3% and China’s CSI 300 index of stocks listed in Shanghai and Shenzhen rose 0.1%.