US stocks move back into black after inflation jitters

US inflation rose more than expected last month, adding to concerns that the US economy may be overheating and increasing speculation about faster interest rate rises.

The headline inflation rate hit 2.1 per cent in January – higher than the 1.9 per cent predicted by most analysts. But while the figures helped to send stock markets lower in morning trading, as Wall Street approached lunchtime the indices had regained much of their ground.

In part, this reflected a separate report that showed retail sales slowing in January. Retail sales dropped by 0.3 per cent between December and January, indicating a pullback by consumers.

Financial and tech stocks rallied throughout the morning pushing the indices back into the black.

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Bonds

Last week’s financial market turmoil was sparked by concerns US wages and prices were suddenly rising quickly, and the new data led to a strong sell-off in benchmark 10-year Treasuries, sending yields above 2.9 per cent to a new four-year high.

While the Nasdaq had dropped as much as 0.5 per cent, it had climbed back up by almost 1 per cent to 7077 by noon. Similarly the S & P 500 was trading more than nine points higher after falling earlier in the session.

Financials and technology both led the benchmark index higher, up about 0.7 per cent each, while real estate and utilities - sectors that act like bond proxies - led the declines, down 1.5 per cent and 0.9 per cent, respectively.

Banks are sensitive to changes in interest rates and are believed to benefit in a higher rate environment as it tends to boost their net interest margin – the difference between the rate banks charge for loans and the yield they pay on deposits – a key driver of profits.

Meanwhile the Dow Jones Industrial Average, which had declined as much as 0.6 per cent, was up 0.1 per cent to 24,670.21 and the Nasdaq Composite, which had declined as much as 0.5 per cent, climbed 0.9 per cent to 7,071.29.

The Iseq, which weakened by close to 0.5 per cent in early trade, was 0.18 per cent stronger by mid-afternoon.

Nervousness

Markets initially turned lower after data on Wednesday morning showed that inflation surpassed expectations for a second straight month, triggering nervousness the uptick in price pressures could force the Federal Reserve to accelerate its pace of tightening. However, investors appeared to shake off those concerns by late morning trade.

Meanwhile, the yield on the US 10-year Treasury, was up 4.2 basis points to 2.871 per cent, while that on the more policy sensitive 2-year was up 4.7 basis points to 2.151 per cent. Yields move inversely to price.

Elsewhere, the dollar index, a gauge of the buck against a basket of peers, was down 0.5 per cent to 89.33.

– Additional reporting Copyright The Financial Times Limited 2018