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Wall Street’s blue-chip benchmark headed for its worst week in two months on Friday as renewed inflation concerns clouded optimism about continued central bank support to financial markets.
The S&P 500 stock index hovered in New York at lunchtime, but remained 0.9 percent in the red during the week, its worst performance since July. The technology-oriented Nasdaq Composite gained 0.1 percent, while the Dow Jones Industrial Average hardly changed.
Investor confidence was shaken on Friday when data showed US factory gate prices rose 0.7 percent in August from the previous month, beating economists’ expectations of a 0.6 percent increase.
Ian Lyngen, interest rate strategist at BMO Capital Markets, said the inflation indicator had “added to ongoing concerns about increased cost structures” as supply chain disruptions caused by the Covid-19 pandemic continued.
Jorge Garayo, Global Head of Inflation Strategy at Société Générale, said: “The market is starting to think that maybe 2022 will be a year when inflation will stay high.”
“I haven’t seen anything to convince me when this malfunction will be fixed,” added Garayo, citing a shortage of everything from computer chips to cabinets, caused in part by coronavirus-triggered shutdowns in Asian producing countries.
US Treasuries were sold, bringing the yield on 10-year Treasuries up 0.05 percentage points to 1.35 percent.
In Europe, too, government bonds fell out of favor, one day after the continent’s central bank announced that it would “moderately” curb bond purchases as part of its monetary policy emergency program amounting to 1.85 trillion euros.
The yield on ten-year German government bonds – the benchmark for safe investments in the euro zone – rose by 0.03 percentage points to minus 0.33 percent, while the yield on the corresponding Italian bond rose by the same amount to 0.70 percent.
The President of the European Central Bank, Christine Lagarde, signaled that the bond purchase could continue in another form in 2022, saying: “There is still a way to go before the damage to the economy caused by the pandemic is repaired”.
The move by the ECB is “symbolic of the fundamental change ahead,” said strategists at Bank of America. “Central banks as buyers of first instance are stepping down.”
Antonio Cavarero, Head of Investments at Generali Insurance Asset Management, argued that central bankers continued to be reluctant to cut their emergency bond purchases, which has depressed bond yields and increased the relative attractiveness of stocks.
“Don’t expect a straight line towards monetary tightening,” he said. “Central banks are sending signals to test the waters to see if markets and economies can accept the idea of higher interest rates.”
European stocks also ended the week weaker, with the regional benchmark Stoxx 600 down 0.3 percent, a weekly decline of 1.2 percent, the sharpest drop since mid-August.
The dollar index, which measures the US currency against six benchmarks, remained unchanged. Brent crude, the oil benchmark, rose 1.9 percent to $ 72.76 a barrel in response to production delays caused by Hurricane Ida.
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