Wall Street ends lower as inflation debate intensifies

Technology stocks stabilised on Tuesday despite sharp declines more broadly across Wall Street, as investors weighed whether resurgent inflation could prompt central bankers to rethink current loose monetary policy.

The blue-chip S&P 500 index closed lower by 0.9 per cent. The Nasdaq Composite — whose largest constitute includes big tech groups Apple, Amazon, Facebook and Tesla — initially dropped 2 per cent before paring back most of those losses to end down 0.1 per cent as “buy the dip” investors re-emerged.

Asset manger Cathie Wood dismissed the prospect of a deeper bear market in technology shares at a monthly webinar with investors held on Tuesday. She said funds run by her firm, Ark Investment, which has become a bellwether for speculative tech stocks, had endured many big drops over the past five years.

“Our long-term performance is determined by what we do in downturns,” she said. “We average down and it has been a successful strategy.”

Since its February peak, the value of Wood’s flagship Ark Innovation fund has tumbled by about a third, as the value of its shares in companies such as Tesla have fallen sharply. The prospect of higher interest rates, should inflation be sustained, threatens to undermine the valuations of tech companies in particular, whose profits lie further in the future.

On Tuesday, Wood predicted that the recent surge in many commodities prices, which has jangled investors’ nerves for its impact on inflation, would give way to a “very serious correction”.

Fed officials, meanwhile, have reassured investors that they would pursue a “patient” approach to adjusting their monetary policy in the face of higher inflation and job gains, a message echoed by Fed governor Lael Brainard on Tuesday, who said a “transitory surge” in inflation would abate when imbalances in the supply chain and labour market resolve themselves.

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Data to be published on Wednesday are expected to show headline consumer prices in the US rose 3.6 per cent in April from the same month last year.

“Inflation is creating a lot of fear among investors because of the possibility that the central banks are not ready to deal with it,” said Aneeka Gupta, research director at WisdomTree.

Line chart of Five year breakeven rate (%) showing Investors' inflation expectations are at a 15-year high

The spectre of cost pressures was raised on Tuesday by data showing Chinese factory gate prices, an indicator of what domestic consumers and western importers will pay for goods, rose to a three-year high of 6.8 per cent last month, year on year.

Meanwhile, mentions of “inflation” among executives in Wall Street corporate earnings conference calls are near the record high struck a decade ago, with many companies saying they plan to pass on higher costs to consumers, according to Bank of America.

Price growth is being fuelled by a global computer chip shortage and a boom in commodities from lumber to steelmaking ingredient iron ore.

Inflation is an increasingly hot topic on US earnings calls

The yield on the benchmark 10-year US Treasury bond rose 0.02 percentage points to 1.62 per cent on Tuesday as prices of the debt weakened. The 10-year yield has climbed from about 0.9 per cent at the start of the year as traders bet rising inflation would erode the returns on such fixed-income securities.

“We have so many elements of a strong recovery,” said Kristina Hooper, chief global market strategist at Invesco. “We have elevated household savings, we have pent up demand, we have significant fiscal stimulus and very supportive monetary policy . . . I would expect the 10-year [yield] to go up.”

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Europe’s Stoxx 600 index closed down 2 per cent, as did the continent’s tech sub-index. That followed declines in Asia, where Tokyo’s Topix slid 2.4 per cent and Hong Kong’s Hang Seng dipped 2 per cent.

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