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US stocks advanced and Treasury yields fell on Wednesday as investors shrugged off a higher than expected inflation report.
The benchmark S&P 500 equity index manage to carve out a 0.1 per cent gain by the closing bell in New York, after having dipped into negative territory. Traditionally defensive sectors such as utilities, consumer staples and healthcare were among the best-performing segments. The technology-focused Nasdaq Composite gained 0.3 per cent.
New data showed US consumer prices climbed at an annual rate of 3.7 per cent in August, up from 3.2 per cent in the previous month and marginally above analysts’ forecasts. Core inflation fell from 4.7 per cent to 4.3 per cent over the same period, in line with expectations, but surprised to the upside on a monthly basis, adding 0.3 per cent compared to July.
Traders initially sold short-term US debt, but had piled back in by the afternoon session. The yield on interest rate-sensitive two-year US Treasuries fell 0.03 percentage points to 4.98 per cent. Bond yields fall when prices rise.
An increase in the headline figure was expected as oil prices have climbed since June after oil exporters Saudi Arabia and Russia announced supply cuts in an effort to prop up prices.
“The main impact on the headline inflation rate comes from rising energy prices but the Fed is likely to look through this given core inflation remains subdued,” said Richard Garland, chief investment strategist at Omnis Investments.
Some parts of core inflation are hard for the Federal Reserve to knock down, Simplify Asset Management chief strategist Michael Green said. He pointed to components such as motor insurance, which is up 19 per cent on an annual basis owing to the higher prices paid for new vehicles in recent years.
“The Fed is in a very difficult position where factors outside of their control are now the primary drivers” of inflation, Green said.
Despite the uptick in headline inflation, traders still expect the Fed to keep interest rates steady at its policy meeting next week.
“The combination of slower core inflation, slower job growth, and an uptick in the unemployment rate in August will almost certainly be enough for the Fed to hold interest rates unchanged,” wrote Bill Adams, chief economist for Comerica Bank.
International benchmark Brent crude reversed early gains to settle 0.2 per cent lower at $91.88 a barrel on Wednesday, having hit a 10-month high earlier in the day. The US equivalent West Texas Intermediate fell 0.4 per cent to $88.52.
Recent pressure on prices, however, has prompted traders to tip their bets in favour of another rate increase by the European Central Bank, which is due to announce its policy decision on Thursday. Swaps markets are now placing a 63 per cent probability that the central bank will increase eurozone interest rates by 0.25 percentage points to 4 per cent this week.
Yields on the policy-sensitive two-year German Bunds, a regional benchmark in Europe, rose 0.04 percentage points to 3.16 per cent on Wednesday.
If “the ECB does decide to hike tomorrow, they are more likely to indicate a willingness to pause thereafter, keeping the impact on the terminal rate fairly limited”, said Jason Davis, global rates portfolio manager at JPMorgan Asset Management.
Europe’s region-wide Stoxx 600 ended the day 0.3 per cent lower, extending losses from the previous session, while France’s CAC 40 and Germany’s Dax fell 0.4 per cent.
Asian markets edged lower on Wednesday, with China’s benchmark CSI 300 down 0.6 per cent while Hong Kong’s Hang Seng and Japan’s Topix each gave up 0.1 per cent.