US stocks hit new highs on infrastructure spending optimism; cautious mood reigns in Asia
• The Dow rose 0.3%, the S&P 500 and the Nasdaq Composite gained 0.1% to new highs after the House of Representatives passed a more than US$1 trillion infrastructure spending bill. The infrastructure bill puts hundreds of billions of dollars into improving the electrical grid, improving internet security and building charging stations for electric vehicles. It could also provide a small boost to economic activity. Companies that would benefit from the spending saw their stocks gain.
• The news also sent the 10-year Treasury yield up to 1.5% from a closing level of 1.45% on Friday. The yield’s downward spiral had momentarily prompted fear of an economic slowdown to come, so markets seem pleased to see the yield move higher again. That’s all good for stocks for now, but Federal Reserve Vice Chair Richard Clarida said that the central bank could easily lift interest rates by the end of 2022. If inflation remains relatively high, eating into consumer demand, the Fed could still raise rates. That would dent economic growth, and the stock market. Data on Wednesday is expected to show that US headline consumer price inflation rose to its highest level since 1990 last month.
• We expect the Fed will not start hiking rates until 2023 to allow labour market slack to be fully absorbed. America is still 4.2 million jobs short of early 2020 levels and labour force participation remains stuck at 61.6%, below its pre-crisis rate of 63.3%. Thus, the combination of strong US growth and Fed dovishness is likely to keep supporting risk assets in 2021 and 2022.
• Hong Kong’s Hang Seng index fell 0.4% and Tokyo’s Nikkei 225 closed 0.4% lower, as traders turned cautious at the start of the sixth plenum of China’s ruling party, which is expected to set the stage for President Xi Jinping securing an unprecedented third term.
• Other developments, such as rising oil prices and a media report that Scenery Journey, a unit of China Evergrande Group, hasn’t made interest payments to some offshore bondholders, also appeared to add a cautious tone. Healthcare stocks were sold off along with Covid-19 vaccine makers in the region during a rotation into cyclical shares after Pfizer announced its pill reduced Covid-19 hospitalisations and deaths substantially.
• China’s stocks recovered from earlier losses to close higher as investors reacted to trade data released over the weekend. The Shanghai Composite was up 0.2% to 3,498.63 while the Shenzhen Component climbed 0.32% to 14,508.86 as official data show China’s exports surging 27.1% in October as compared with a year ago. That was higher than the 24.5% growth forecast by analysts in a Reuters poll.
• Singapore shares also closed higher on Monday with the key Straits Times Index up 0.66% to 3,263.90. The gains were chalked up amid extended optimism from the previous week’s showing; the benchmark STI rose to a post-pandemic high of 3,2425 on Friday (5 Nov), buoyed by better-than-expected earnings from Singapore’s banking trio and easing of border restrictions.