US stocks moved further into record territory on Friday to secure their strongest weekly performance since February, as enthusiasm for President Joe Biden’s infrastructure spending deal outweighed concern over the highest US inflation reading in 29 years.
The S&P 500 rose 0.3 per cent on the session, ending the week up 2.7 per cent.* The tech-focused Nasdaq Composite closed fractionally down from its record close on Thursday.
“If enacted, [the infrastructure plan] would increase GDP by roughly 1 per cent at its peak effect in 2025-26,” a note by Evercore ISI Research predicted.
The deal outweighed Friday’s release of data showing core personal consumption expenditure in the US — the Federal Reserve’s preferred measure of price rises — hitting 3.4 per cent in the 12 months to May, its largest annual increase since 1992.
The month-on-month inflation rise was slightly below economists’ expectations, however, potentially taking some pressure off the US central bank to change its ultra-loose monetary policy.
“We’re seeing a small sigh of relief, with equities also supported by the infrastructure news,” said Keith Parker, chief US equity strategist at UBS. Expectations that companies would report strong second-quarter earnings as they reaped the benefits of the US economy’s reopening were also “a strong tailwind”, he added.
Ten-year US Treasury yields rose by nearly three basis points to 1.53 per cent at the market close as government debt prices softened.
Investors holding bonds, which are more sensitive to inflation than equities, fear price rises are becoming more persistent. For the first time since April 2018, inflation was the issue credit investors were most worried about, according to a Bank of America survey published on Friday.
“There is little doubt that inflation prints in the next few months will continue to be high,” said Francesco Sandrini, senior multi-asset strategist at fund manager Amundi.
“But markets are struggling to find confidence in terms of what to do about it” following mixed messages from Fed officials about whether price rises should result in tighter monetary policy, he said.
Jay Powell, Fed chair, has continued to characterise surging prices as transitory but St Louis Fed president James Bullard indicated on Thursday he thought price rises could be problematic. “A new risk is that inflation may continue to surprise to the upside,” he said in a presentation.
Schroders strategist Sean Markowicz said: “What we might see into next year is that higher commodity prices will feed into higher input prices, which feed into higher consumer prices and then higher wages.”
That left open the question of whether Powell’s “transient” inflation “means six, 12, 18 months or more”, added Markowicz.
In Europe, the Stoxx 600 index closed up 0.1 per cent, leaving the continent-wide benchmark up 1.2 per cent for the week.
The recent rally in oil gathered pace, with Brent crude climbing a further 0.7 per cent to above $76 a barrel, the global marker’s highest level since October 2018.
*This story has been corrected to make clear the S&P 500’s weekly performance was the best since February
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