US stocks recovered early losses following the release of the minutes of the Federal Reserve’s Open Market Committee meeting last month, at which interest rates were left on hold after 17 successive tightenings.
Ian Shepherdson, chief US economist at High Frequency Economics, said the minutes showed that the decision to leave rates on hold was a close call.
“But the Fed staff’s expectation that ‘growth below potential over the next six quarters’, as a result of previous tightenings, would be enough to induce a gradual decline in inflation appears to have swung most of the waverers,” Mr Shepherdson said.
He also noted the central bank’s concerns about the housing market and the risk of a further rise in core inflation. But he added that the minutes made the point that a recent acceleration in shelter costs, which contributed substantially to the increase in core inflation, could prove short-lived.
“In short, the FOMC appears to think it has done enough, though it is far from certain.”
By the close, Wall Street had moved into the black, with both the Dow Jones Industrial Average and the S&P 500 up 0.2 per cent. The Nasdaq Composite gained 0.5 per cent. Wall Street had earlier come under pressure after weak US consumer prices raised fresh concerns about an economic slowdown.
The Conference Board said its index of US consumer confidence fell from 107 in July to 99.6 in August, the lowest level for nine months.
“While some of the downturn in confidence is likely a lagged response to high gasoline prices all summer as well as geopolitical concerns, it appears the labour market is mainly to blame for consumer woes in August,” said Gina Martin, financial economist at Wachovia.
“We doubt that the August drop in confidence predicts an extended downturn in economic growth. Instead, it is more likely that consumers are reacting to the middle of the business cycle just as they did in 1995-96.”
Steven Wieting at Citigroup also said the outlook might not be as grim as the headline figures suggested.
“Wholesale gasoline prices now point to a roughly 50 cent drop in retail gasoline per gallon from the August peak through October,” he said.
“Despite the decline in confidence, indications suggest consumer spending will slightly outperform broader economic activity in the second half of 2006.”
In Europe, the FTSE Eurofirst 300 index rose as much as 0.7 per cent to its best level since May 12 before easing back to end just 0.2 per cent higher.
Asian equities recouped some of their recent losses as investors responded positively to Monday’s sharp drop in oil prices.
In Tokyo, the Nikkei 225 Average rose 0.8 per cent, breaking a four-day losing streak, while South Korean stocks climbed 1.3 per cent to a three-month high
The dollar suffered a broad-based sell-off in the wake of the confidence data and the Fed minutes, with the euro pushing back above the $1.28 level.
Treasury bond prices were lower in early trade following a $22bn sale of two-year paper. The yield on the two-year note reached 4.93 per cent before the Fed minutes, but then reversed to finish 1bp lower at 4.86 per cent.
Oil prices remained on the back foot after falling sharply on Monday as fears of storm damage to oil installations in the Gulf of Mexico receded.
October West Texas Intermediate settled 90 cents lower at $69.71 a barrel after ending on Monday at $70.61.