Wall Street stocks hit a record high before losing ground in the afternoon as investors awaited details on a further stimulus package coming out of Washington.
The blue-chip S&P 500 index finished the day down 0.4 per cent after spending most of the day above par. The tech-heavy Nasdaq Composite was one of the benchmarks climbing to intraday peaks in the morning session, before erasing all of its gains to close the day down 0.1 per cent. The Dow Jones Industrial Average and Russell 2000 index of small-cap companies were also at record levels in the first part of the session.
Joe Biden is expected to unveil plans for a relief package on Thursday as data showed the number of new unemployment claimants in the US rose last week at the fastest pace since August. The president-elect intends to spend “trillions of dollars” on cheques for individuals, unemployment benefits and investments in clean energy and infrastructure.
Nick Nelson, head of European equity strategy at the investment bank UBS, said the stimulus announcement would be “key” for market sentiment. “If we are going to get considerably more spending, that creates a stronger global growth backdrop,” he said.
In Europe, the continent-wide Stoxx 600 index closed up 0.7 per cent, while London’s FTSE 100 benchmark rose 0.8 per cent, taking its gain this month to more than 5 per cent.
Investors have responded to Mr Biden’s fiscal plans by selling off US government debt because of concerns the spending will feed through to higher inflation, which erodes the value of Treasuries’ fixed-interest payments.
On Thursday the yield on the US 10-year note, which moves inversely to its price, rose another 0.04 percentage points to 1.12 per cent, having crossed 1 per cent last week for the first time since March.
US investors also have an eye on forthcoming company results. The US corporate earnings season kicks off on Friday with reports from JPMorgan Chase, Citigroup and other large banks.
Over the next week investors’ attention may “swivel back” from the macroeconomic outlook and politics to how companies are faring, said Mr Nelson, with traders keen to find out management teams’ forecasts for a vaccine-led recovery. But “it remains difficult for businesses to look round corners”, he added.
“From a global portfolio perspective the focus at the moment is Biden and the Fed,” said Louise Dudley, global equities portfolio manager at Federated Hermes.
In a closely watched speech, Federal Reserve chairman Jay Powell reiterated that a US interest rate rise in not in the cards. His comments came a day after his vice-chairman, Richard Clarida, pushed back against fears the US central bank would respond to rising inflation by increasing rates. “We are not going to hike” until inflation reaches 2 per cent, he said in remarks reported by Reuters at a Hoover Institution event.
The 10-year break-even inflation rate is above 2 per cent for the first time since 2018 and the 5y5y inflation swap is at the highest level since the global tapering in end-2018, analysts at Citigroup noted.
The US labour department reported on Wednesday that consumer prices rose 1.4 per cent, year on year, in December. The increase was slightly ahead of the 1.3 per cent expected by economists polled by Reuters and Bloomberg.
Negative real interest rates, where inflation exceeds benchmark borrowing costs, would “continue to provide strong support for stock markets”, said Emily Penn, capital and investment director at the insurer LV, as investors would pay higher-than-usual valuations for companies’ future earnings.