US technology stocks dropped on Monday as investors braced for further signs that inflationary pressures in the world’s largest economy are building.
The blue-chip S&P 500 closed 1 per cent lower, while the technology focused Nasdaq Composite snapped a two-day winning streak to slide 2.6 per cent.
US government bonds joined in on the selling, sending longer-dated yields higher. The benchmark 10-year Treasury note traded at 1.6 per cent, a roughly 0.03 percentage point increase on the day.
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.
Data released by the New York arm of the US central bank on Monday underscored that consumers were also girding themselves for higher prices. According to a recent survey, median inflation expectations for the year ahead edged up to 3.4 per cent in April, the highest level since September 2013.
Market measures of inflation expectations have also climbed. One popular gauge, the five-year break-even rate, reached its highest point in roughly 15 years on Monday, above 2.7 per cent.
The Fed has pledged to remain relaxed about inflation over its 2 per cent target as the US economy heals from the pandemic. The central bank has indicated 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,” said 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”.
Technology stocks have also been pandemic winners that some analysts suspect will find it hard to sustain their current levels of earnings growth as lockdowns ease.
The Nasdaq rallied to a high last month as its largest companies reported strong first-quarter results. On Monday, Citigroup downgraded its rating on Facebook and Google parent Alphabet’s shares to neutral, saying “growth will probably decelerate” from the second quarter of this year. Facebook’s shares fell 4.1 per cent on Monday and Alphabet’s were 2.6 per cent lower.
“Another cloud over the tech sector is US tax reform,” said Marco Pirondini, head of US equities at Amundi. US president Joe Biden is pushing for a global minimum corporate tax rate to stop multinationals channelling profits through low-tax jurisdictions, in a move that threatens the business models of the world’s largest tech companies.
The dollar index, which measures the US currency against a group of trading partners’ currencies, drifted 0.1 per cent lower. The index has fallen 0.8 per cent since a report on Friday showed the US created a much weaker than expected 266,000 new jobs in April.
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 hovered at $68.23 a barrel. Europe’s Stoxx 600 share index ended the session 0.1 per cent higher.