U.S. stocks struggled to hang on to small gains Tuesday after a weaker-than-expected reading on consumer confidence, with support attributed in part to signs that efforts by Federal Reserve officials to soothe worries over a pickup in inflationary pressures were bearing fruit.
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On Monday, stocks rose, with technology shares leading the way. The Dow
DJIA,
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Stocks started the day with modest gains, but pulled back ahead of economic data, then flipped between small gains and losses after the Conference Board said its survey-based consumer-confidence index slipped to 117.2 in May from a revised 117.5 a month earlier. The original April reading was notably higher at 121.7 and had marked a pandemic high.
“Worries about prospects beyond the reopening are likely weighing on consumer attitudes although easing health concerns alongside an economic reopening that will bring back jobs and restore incomes should provide some support over coming months,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.
Meanwhile, investors remain focused on inflation and inflation expectations. Rising inflation has been blamed for heightened stock-market volatility after data earlier this month showed the consumer-price index rose 4.2% year-over-year in April. The data prompted fears the Federal Reserve could move earlier than anticipated to begin pulling back on its monetary policy accommodation.
Since then, Fed officials, with few exceptions, have offered reassurances that they view near-term inflation pressures as transitory, signaling they would look through a near-term pickup in price pressures as the economy recovers from the coronavirus pandemic.
For example, the recent strong U.S. inflation readings are not the start of a steady move higher in consumer prices, Chicago Fed President Charles Evans said on Tuesday.
“As a chorus of Fed officials reiterated that the recent pickup in inflation would be transitory, investor fears were soothed about rising prices forcing higher interest rates,” said Lukman Otunuga, senior research analyst at FXTM, in a note. “U.S. equity bulls rejoiced on this development, encouraging buying in expensive growth stocks in sectors such as technology.”
Reassurances by Fed officials, however, haven’t fully erased investor worries, he said, which means markets will remain highly sensitive to changes in inflation expectations and remarks by policy makers, he said.
Chicago Fed President Charles Evans on Tuesday reiterated the transitory inflation message, while also noting that a Friday reading of the Fed’s preferred inflation measure, the personal consumption expenditure index for April, was likely to see a significant increase.
“It is important to emphasize that the recent increase in inflation does not appear to be the precursor of a persistent movement to undesirably high levels of inflation,” said Evans, who is a 2021 voting member of the policy-setting Federal Open Market Committee, in a speech to a virtual conference sponsored by the Bank of Japan.
Bitcoin prices have stabilized, squelching another source of broader market volatility, after extending a tumble last week that took the price of the digital asset down 50% from its all-time high above $60,000 over the weekend.
Investors were also sifting through housing data. New home sales fell in April by nearly 6% as affordability constraints began to weigh on home buyers.
Earlier, the CoreLogic Case-Shiller U.S. home price index for March rose 13.3% on an annual basis in March.
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