Stocks on Wall Street turn lower after tame US inflation data

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US stock markets turned lower after hitting record highs on Wednesday, as weaker than expected inflation data reminded bullish investors that an economic recovery from the coronavirus pandemic remained elusive.

The blue-chip S&P 500 dropped 0.2 per cent and the tech-focused Nasdaq Composite fell as much as 1 per cent, following a strong open where both indices rallied to new peaks.

The FTSE All-World index was also down from its all-time high hit earlier on Wednesday, which came off the back of a strong session for stocks that began in Asia overnight. China’s CSI 300 rose 2.1 per cent, taking its gain for the week to almost 6 per cent — which, if sustained, would be the benchmark’s best week since July 2020.

Europe’s Stoxx 600 benchmark had also advanced, led by sectors such as financial services and basic materials that would benefit from economic growth, before closing 0.2 per cent lower. The UK’s FTSE 100 index ended the day down 0.1 per cent.

The turnrounds came after US inflation data for January, released on Wednesday, showed core consumer prices were flat for a second consecutive month, as unemployment and social curbs continued to take a toll. Economists polled by Reuters had expected prices to have risen 0.2 per cent.

“The reflation trade is the hot topic, but there is no sign of it becoming a bigger issue in the short-term data,” said Neil Birrell, chief investment officer at Premier Miton Investors.

The inflation data were released as US President Joe Biden’s $1.9tn stimulus package continued to be debated in Congress. The size of the spending programme has prompted Wall Street analysts to beef up their forecasts for economic growth.

Prospects for a strong economic rebound later in the year have also unsettled investors, stoking fears that the US central bank will dial back its $120bn-plus of monthly asset purchases that have supported financial markets throughout the pandemic.

Column chart of % weekly move showing China's CSI 300 on track for best week since July 2020

How the Federal Reserve will respond the current climate was top of investors’ minds ahead of Jay Powell speaking at the Economic Club of New York on Wednesday about the state of the US labour market.

The Fed chairman has set a high bar for tightening monetary policy, although some economists believe the central bank will soon move to incorporate the effects of a huge fiscal stimulus in its forecasts.

Wednesday’s inflation data provided some support for US government bonds, which had sold off steadily in recent weeks. The yield on the 10-year Treasury, which moves inversely to its price, fell 0.02 percentage points to just over 1.14 per cent.

The dollar, as measured against a basket of currencies, slipped 0.1 per cent while gold rose modestly, up 0.2 per cent, to $1,840 a troy ounce.

Brent crude, the international oil benchmark, climbed 0.7 per cent to $61.53 a barrel, staying around its highest level since the first weeks of the pandemic.

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