Buoyed by the Wednesday afternoon passage of President Joe Biden’s $1.9 trillion stimulus package, the broader market continues to bounce back with a vengeance, but experts are warning lofty government spending could trigger heightened inflation this summer once the economic recovery kicks into overdrive.
The Dow Jones industrial average closed at a record Wednesday, jumping 464 points, or 1.5%, while the S&P 500 climbed 0.6%, and the tech-heavy Nasdaq stayed virtually flat after surging 3.7% Tuesday–its best day in four months.
The Dow rallied Wednesday afternoon after the House of Representatives passed President Biden’s sweeping American Rescue Plan in a 220-211 vote, sending the fiscal relief package to Biden’s desk for signature on Friday.
Yields on the 10-year Treasury, which have driven much of the market’s recent volatility, continued to unwind, falling nearly 5 basis points Wednesday morning and tempering concerns that investors may turn to the risk-free asset class after surging 50 basis points in one month.
The consumer price index, the U.S. benchmark for inflation, rose 0.4% in February on a month-to-month basis and 1.7% year over year, falling in line with economist expectations and marking “a relief” for investors concerned over rapid price spikes during the impending economic recovery, says Vital Knowledge Media Founder Adam Crisafulli.
Global markets, meanwhile, were mixed, with the United Kingdom’s FTSE 100 virtually flat, while Germany’s DAX Index ticks up 0.7% and France’s CAC 40 climbs 0.9%.
What To Watch For
More stimulus. “Democrats are pivoting to their infrastructure plan, which reports suggest could be worth up to $4 trillion over 10 years, but this will have a much harder time getting through Congress as resistance builds to deficit-busting bills,” Crisafulli said Wednesday.
“The inflation reading is certainly a relief–and follows a placid Treasury auction on Tuesday–but the inflation risks remain present, and it’s still likely readings will firm over the coming months,” Crisafulli added, noting that the Federal Reserve believes inflation won’t last beyond the summer. He’s also not bullish that the tech rally Tuesday will extend much longer: “Despite this CPI number, we still think the growth surge from Tuesday should be faded.”
According to the Wednesday CPI report, prices for recreation, shelter, medical care and car insurance increased in February, while prices for airline tickets, apparel, used cars and trucks all declined.
“The only reason why the CPI isn’t higher right now is because of the way it is calculated,” says Nancy Davis, founder of Greenwich, Conn.-based Quadratic Capital Management. “A large part of the calculation is shelter… Right now, some housing markets are booming, but some aren’t and that is keeping the CPI down. There are certainly pockets of inflation in other parts of the economy, most notably in food and gasoline prices.” Gasoline prices jumped 6.4% in February. Food prices ticked up 0.2%, but they’re up 3.6% in the past year.
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