- The S&P 500 index bounced at the 3900 level to finish the session in the green.
- Strong US data triggered a pre-US open sell-off, but dovish FOMC minutes helped stocks recover into the close.
- The Nasdaq fell amid big Tech underperformance whilst the Dow rose.
US equity markets saw buying into the US cash close at 21:00GMT, with the S&P 500 index managing to climb back into positive territory on the day in the final minutes of trade. The index closed up 0.05% just to the north of the 3930 level, an impressive recovery from session lows close to the key 3900 level.
The Nasdaq Composite index also saw buying into the close but was unable to recover back into the green, closing with losses of 0.58% on the day; inflation-sensitive growth stocks (i.e. big Tech), which make up a large portion of the Nasdaq’s capitalisation, suffered on Wednesday after a string of strong US data points, including Producer Price Inflation of 1.3% MoM in January, which was well above expectations for a price growth rate of 0.4%.
The Dow was the outperformer out of the major US indices, finishing the session up 0.29%. Verizon Communications and Chevron Corp gave the index a boost after Warren Buffet’s Berkshire Hathaway disclosed major investments in the companies.
In terms of sectoral performance; energy stocks led the gains in line with strong crude oil price gains. Crude oil was supported on Wednesday as news unfolded of the extent of disruption recent Arctic weather conditions in the south of the US are wreaking on US oil production. Consumer discretionary stocks were the next best performers following strong January Retail Sales data.
Driving the day
Major US bourses saw downside prior to the start of US cash equity trading hours, which then continued through the first half of the trading session. The downside was seemingly provoked by strong US data; the January Retail Sales report (released at 13:30GMT) was a blowout, with headline sales up 5.3% MoM versus expectations for an increase of closer to 1.0%. Core measures of retail spending were even stronger. Consumers evidently spent their government stimulus cheques with gusto and economic reopening in some states likely also helped. Elsewhere, Producer Prices (released at the same time as Retail Sales) rose at a faster than expected pace in January and Industrial Output data, also for January, beat forecasts.
Strong activity and inflation data boosts already sky-high expectations for a strong economic recovery in the US later in the year as the country achieves herd immunity to the virus and is able to near-enough fully reopen its economy. This may seem like a welcome boost, but not if it brings forward the timeline for eventual Fed monetary policy tightening, or if it sends a signal that US President Joe Biden’s $1.9T fiscal stimulus package is “too big”. Hence, markets seem to have seen good data as bad data on Wednesday.
However, the dovish tone to the minutes of the Fed’s last monetary policy meeting (released at 19:00GMT) soothed nerves and helped stocks recover from lows. The minutes revealed, as expected, that the Committee remains willing to look through any transitory pick-up in inflation and remains focused achieving its dual mandate of price stability (defined as getting Core PCE moderately above 2.0% for a sustained period, in line with the bank’s new average inflation targeting policy) and maximum employment, which appears to now place more emphasis on achieving full employment within disadvantaged communities within the US, not just full employment on the whole (which implies running the labour market hot).
With regards to QE tapering, the minutes said that “participants noted the importance of communicating well in advance of any change to the pace of bond purchases”. Thus, Capital Economics “doubt that the Fed will begin to taper its asset purchases until early next year and believe that the first interest rate hike will be delayed until 2024.”
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