US technology stocks dropped on Monday ahead of inflation data this week that could pressure the Federal Reserve to tighten its ultra loose monetary policies.
The blue-chip S&P 500 traded flat in early Wall Street dealings, while the technology-focused Nasdaq Composite fell 1.4 per cent.
US government bonds were steady, with the yield on the 10-year US Treasury at 1.572 per cent.
Analysts expect data on Wednesday to show that headline US prices rose 3.6 per cent in April from the same time last year. Chinese factory gate prices, an early indicator of price pressures for importers in the west, are forecast to have jumped more than 6 per cent in a report to be released on Tuesday.
The Fed has pledged to remain relaxed about inflation over its 2 per cent target as the nation’s economy heals from the pandemic and says it has no plans to reduce its $120bn-a-month of bond purchases that have kept a lid on Treasury yields, which influence borrowing costs worldwide.
But analysts remain concerned about the prospect of several months of strong inflation hitting bond prices and consequently pushing yields higher. Rising bond yields depress valuations of equities, particularly long-term growth stocks in the tech sector that do not pay generous dividends.
“Will inflation lead to a bear market in bonds and a tech sell-off? That is the key market narrative at the moment,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham.
“The Fed can say inflation is transitory as long as economies are reopening . . . That line starts to go stale when major economies such as the US are fully reopened and we still have an inflationary push.”
“One school of thought is that reflation will be orderly and benign,” added Yuko Takano, a portfolio manager at Newton Investment Management, while “you have another camp that sees US inflation hitting 4 or 5 per cent, which could become very disorderly for markets”.
Strengthening the case for the Fed carrying on as normal was data on Friday, which showed US employers added 226,000 jobs in April, down from 770,000 in March.
“The April payroll report should pour some cold water on expectations that economic reopening is leading to an overheating of the economy,” said analysts at TD Securities.
It also formed a “stronger view that central banks can carry on pumping asset markets and commodity prices”, said Rabobank strategist Michael Every.
The dollar index, which measures the greenback against a group of trading partners’ currencies, was steady on Monday but 0.7 per cent below its level just before Friday’s jobs report was released.
Sterling rose 1 per cent to $1.41, after UK Conservative party victories in local elections and the expected announcement of more coronavirus restrictions being lifted from May 17.
China’s renminbi, which is guided by the nation’s central bank, touched a three-year high of 6.41 per dollar.
Elsewhere, Brent crude futures fell 0.2 per cent to $68.15 a barrel. Europe’s Stoxx 600 share index traded flat.