US stocks pull back from record levels ahead of Fed statement

European equities pulled ahead of Wall Street stocks as investors digested a drop in retail sales and speculated on the direction policymakers will take ahead of the conclusion to the Federal Reserve’s latest monthly meeting.

US retail sales in May were down 1.3 per cent against the previous month, although this was “arguably a lot better than it looks”, said Michael Pearce, senior US economist at Capital Economics. There were “big upward revisions to the April data and spending on food and drink services posted another solid increase last month”, he said, suggesting the recovery in services consumption was “on a solid footing”.

Wall Street’s blue-chip S&P 500 was down 0.3 per cent at lunchtime in New York, after reaching its 29th record closing high on Monday. The technology-focused Nasdaq Composite lost 0.7 per cent.

Across the Atlantic, the region-wide Stoxx Europe 600 index closed up 0.1 per cent, hitting another all-time high, while London FTSE 100 rose 0.4 per cent.

Attention was mostly on the Fed, however, which finishes its two-day meeting on Wednesday. Some analysts predict its members will bring forward its projections for its first post-pandemic interest rate rise by a year to 2023.

The central bank may also hold initial talks about reducing its $120bn of monthly bond purchases, although global stock markets have edged up to new records in recent weeks as any tapering is expected to be carefully communicated and gradual.

“Economic data highlight that the US economy is growing at a rapid clip,” said ANZ economist Tom Kenny. “We don’t anticipate any change to the policy guidance language on either rates or asset purchases.”

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Standard Chartered strategist Steve Englander said it would “be hard for the Fed to avoid discussion of tapering, but relatively easy to dismiss any expectation of imminent action as very premature”.

In 2013, when former Fed chair Ben Bernanke announced the central bank was about to reduce its post-financial crisis asset purchases, it roiled asset markets in what became known as the “taper tantrum”.

“We anticipate the [Fed committee] giving itself a few more months to assess incoming data on both inflation and growth, recognising the potential embarrassment of another episode of premature hawkishness,” Englander said.

The Fed’s asset purchases, which have been followed by central banks worldwide, have lowered the yields on government bonds and boosted the appeal of riskier assets such as equities.

The S&P 500 had notched up 28 closing highs for 2021 by the end of last week, according to Credit Suisse strategist Jonathan Golub.

“Importantly, economic activity has improved over this period, the true catalyst of the S&P 500’s advance,” Golub said. Economists expect US gross domestic product to rise at an annualised rate of about 10 per cent in the second quarter of this year as the global economy stages its strongest recovery from a recession in eight decades.

The dollar index, which measures the US currency against trading partners, was flat. The euro was steady against the dollar to $1.2118. Sterling dropped 0.2 per cent to $1.4079, its weakest level in a month.

International oil benchmark Brent crude added 1.5 per cent to $73.94 a barrel, its highest since April 2019.

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