- US stock futures inched higher Thursday after data showed inflation soared to 7% in December.
- Bond yields also rose slightly as investors digested the hottest inflation reading since 1982.
- One strategist said he expects the key US bond yield to hit 2% but for stocks to continue to rise.
US stock futures edged higher, having earlier fallen into the red, as investors digested data which showed inflation hit a 39-year high in December. Bond yields also rose.
Stocks rose Wednesday, despite the red-hot inflation reading, with the benchmark S&P 500 finishing 0.28% higher.
Year-on-year consumer price index (CPI) inflation hit 7% in December, according to data released Wednesday.
It was the biggest increase in prices since 1982 and the third straight month above 6%, although it was in line with analysts’ expectations.
Strong inflation has caused the Federal Reserve to pivot towards fire-fighting mode. Markets now expect the central bank to raise interest rates at least three times in 2022, starting in March, while many investors expect four or more hikes.
Expectations that the Fed will turn off the stimulus taps has caused volatility at the start of the year. Speculative tech stocks – which zoomed higher when interest rates were at rock bottoms – have been particularly hard hit. The tech-heavy Nasdaq 100 index was down 2.5% for the year as of Wednesday’s close.
Fed Governor Lael Brainard said Wednesday that “inflation is too high”, in prepared remarks to Congress ahead of her confirmation hearing to become vice chair. In a sign of the Fed’s new focus, she said bringing down prices is the central bank’s “most important task.”
Government bond yields, which move inversely to prices, resumed their steady climb higher after dipping Tuesday and treading water Wednesday. With interest rates expected to go up, investors are demanding higher returns on bonds.
The yield on the key 10-year US Treasury note rose by less than a basis point to 1.75%. It’s up sharply from mid-December, when it traded at around 1.4%.
“We expect the US 10-year yield to move from the current [level] to around 2% over the coming months,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Yet Haefale said he thinks equities will be able to climb despite bond yields going up, saying that fourth-quarter earnings season, which kicks off this week, is likely to boost investor confidence.
Analysts at data company FactSet estimate that earnings for S&P 500 companies rose 22% in the fourth quarter, with the energy, industrials and materials set for the biggest gains.
Bitcoin rose 2.7% to $43,902 as it tried to break out of its recent slump. The digital asset is a long way off its November record high of close to $69,000 however, having been hit hard by expectations that the Fed will sharply cut its support for markets.