US inflation data fails to spook Wall Street with S&P index hitting record high

Saturday, 11 December 2021

Stuff Business Editor Susan Edmunds is joined by Infometrics chief forecaster Gareth Kiernan and principal economist Brad Olsen to talk about what’s really happening in the economy.

New Zealand financial markets look set to get off to a calm start trading next week after United States inflation data published overnight on Friday failed to spook Wall Street where shares hit a record.

Annualised inflation in the US reached a near 40-year high of 6.8 per cent in November, according to the US Bureau of Labor Statistics.

But investors appear to have taken heart from the fact the monthly increase in the consumer price index of 0.8 per cent was slightly down on the October increase of 0.9 per cent, and that the figures were broadly in line with forecasts.

The S&P 500 index – which tracks the share price of the largest companies on the New York and Nasdaq stock exchanges – closed up nearly 1 per cent at a record high of 4712 points on Saturday morning New Zealand time.

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US Federal Reserve chairman Jerome Powell is expected to be at centre of the action next week when the central bank is expected to discuss tightening its currently very loose monetary policies.

The US Federal Reserve had previously stopped describing higher inflation as “transitory” and indicated it would discuss tightening monetary policy by further reducing the purchases of bonds under its quantitative easing programme at a two-day meeting later next week.

But the market reaction to the inflation data suggests investors do not believe it has materially brought forward the date at which the US central bank might start increasing interest rates.

Most analysts believe the first US rate rises could come around the middle of next year, before gathering pace in 2023.

The timing of monetary policy tightening in the US is likely to flow through to other markets, including New Zealand.

Reserve Bank governor Adrian Orr emphasised the extent to which local conditions, including New Zealand house prices, were subject to overseas factors in a speech to the Property Council in November.

He said then that “low global interest rates” had contributed to rising house prices while playing down the impact of its own low official cash rate, saying that had only played a “bit part”.

New Zealand was a “price taker” when it came to determining the level of long-term interest rates, he said then, saying it was a small economy that “must accept the fact that saving and investment decisions in the rest of the world determine the bulk of our interest rate levels”.

Next’s week US Federal Reserve meeting will wrap up on Thursday morning, New Zealand time.