US stock markets edged higher on Wednesday as investors digested opaque messages from policymakers about the path of crisis-era stimulus.
Wall Street’s blue-chip S&P 500 index was up 0.2 per cent at the closing bell, while the technology focused Nasdaq Composite rose 0.6 per cent. Europe’s pan-continental Stoxx 600 index closed the day flat.
“We are talking about talking about tapering,” San Francisco Fed president Mary Daly told CNBC on Tuesday evening, referring to the US central bank’s programme of $120bn of monthly asset purchases introduced in March 2020 to push down borrowing costs and prevent an economic depression.
“But I want to make sure that everyone knows it’s not about doing anything new,” she added, in comments that echoed an earlier statement from Fed vice-chair Richard Clarida.
Randal Quarles, also a Fed vice-chair, followed up on Wednesday, saying he believed that even after “discounting temporary factors”, the increase in US inflation since December would “prove sufficient” to merit a drawdown in asset purchases later in 2021.
Arnab Das, global market strategist at Invesco, said that “if the Fed is too strident about tapering there could be a [market] tantrum, whereas if they are dovish about it there could be too much [financial] risk-taking”.
“Some of the messaging is confusing, but perhaps intentionally so.”
US stock market investors are increasingly sensitive to signals about changes in monetary policy after equity valuations rose to historically high levels, boosted by trillions of dollars of government stimulus and the Fed’s bond purchases.
Valuing US shares on the basis of a cyclically adjusted earnings yield — a gauge used to assess whether stocks are likely to be over- or undervalued — show they are the most expensive since the dotcom bubble of the late 1990s, according to analysts at Goldman Sachs.
These valuations are where they “should be” for now, Goldman analysts said in a research note. But pressure on lofty valuations would probably arise from sustained high inflation in the US, an associated rise in bond yields and a weaker jobs market, they added.
“Unusually low bond yields, low inflation and a rapidly improving labour market are conditions that should be associated with unusually high valuations,” they said. “As yields rise and labour market improvement eases, however, the macro support for valuations is likely to erode.”
US government bonds came under pressure Wednesday afternoon, with the yield on the 10-year Treasury, which moves inversely to its price, up two basis points to 1.58 per cent. This yield, which has climbed from about 0.9 per cent at the start of 2021, has been pinned down in recent weeks by repeated comments from Fed officials that a flare-up in US inflation will be temporary.
The Fed will get new inflation data on Friday, with forecasters expecting that prices for personal consumption goods excluding food and energy will rise at a 2.9 per cent annual rate in April. That would be the highest reading since June 1993, and beyond the Fed’s 2 per cent inflation target.
The dollar index, which measures the greenback against leading currencies, rose 0.5 per cent but remained close to its lowest level of this year. The euro dipped by the same margin against the dollar to $1.2194, while the sterling dropped 0.2 per cent to $1.4123.
Global oil benchmark Brent crude rose 0.2 per cent to $68.82 a barrel.