US stocks edge up despite 8.5pc inflation in March

US stock indexes climbed and a selloff in government bonds reversed, immediately after inflation data showed that consumer prices accelerated to a new four-decade high of 8.5 per cent in March.

The Biden administration plans to temporarily allow high-ethanol content gasoline to be sold this northern summer, in an attempt to ease fuel prices at the pump. Picture: Getty Images / AFP

US stock indexes climbed on Tuesday and a selloff in government bonds reversed, immediately after inflation data showed that consumer prices accelerated to a new four-decade high in March.

The S&P 500 rose 0.6 per cent, later reaching a 1.0 per cent gain, the Dow Jones Industrial Average edged up 0.3 per cent and the technology-heavy Nasdaq Composite rose 1.2 per cent. On Monday, major indexes retreated, with the benchmark S&P 500 losing 1.7 per cent.

The yield on the benchmark 10-year Treasury note fell to 2.712 per cent on Tuesday, having risen earlier to its highest level since 2018. On Monday, the yield settled at 2.779 per cent. Bond yields fall when bond prices rise.

US Labour Department data showed that the consumer-price index rose to 8.5 per cent in March from a year before, as surging energy prices and higher food costs hit consumers, and was higher than some economists had forecast. The data outpaced February’s 7.9 per cent reading and marked a multidecade high.

The sharp market reaction surprised some analysts and investors. However, some pointed to the slowdown in on-the-month core price rises as a possible reason. The core price index, which excludes volatile food and energy prices, rose 0.3% in March, below economists’ expectations, and down from 0.5 per cent in February.

There was “a lack of significant upside surprise in the data”, said Craig Erlam, senior market analyst at Oanda.

“Maybe that’s given the market some impression that [inflation] … may be plateauing. I think what frightened traders so much in recent months is that they were constantly underestimating it.”

Money managers expect the reading will factor heavily into the US Federal Reserve’s rate-rise decision at its May meeting, and many anticipate the central bank might increase rates by a half-percentage point. Federal-funds futures — derivatives used to bet on the path of interest rates — show a nearly 90 per cent probability of such a rate rise, up from about 78% last week, according to CME Group.

Accelerating inflation stands to weigh heavily on a fragile stock market, which has been battered this year by investor anxieties around the war in Ukraine and central-bank policy. Strict Covid-19 lockdowns in Shanghai have added to traders’ worries lately, with data showing that China’s restrictions are beginning to weigh on its economy.

Investors are also grappling with concerns about the rising risk of a US recession within the next 12 months.

“I think some people are hoping that today’s [inflation] print will be the high-water mark,” said Huw Roberts, head of analytics at Quant Insight.

“The main debate in the markets at the moment is price inflation and growth deflation. At what point does the inflation spike cause the Fed to hike so aggressively … that we tip into a growth deflationary environment.”

Meanwhile, Brent crude, the international oil benchmark, rose 5.6 per cent to $US104.06 a barrel, recouping some of Monday’s losses.

Lockdowns in China and planned releases from strategic reserves in the US and elsewhere have pressured oil prices downward recently. The Biden administration plans to temporarily allow high-ethanol content gasoline to be sold this northern summer, in an attempt to ease prices at the pump.

Shares of energy companies rose alongside oil prices. The S&P 500’s energy sector was its best-performing group in early trading, rising 3.1 per cent.

Dow Jones