US close: Stocks hit record highs on strong data; Fed divided over rate hikes

US stocks hit records highs on Wednesday following solid data on manufacturing and construction spending, as the minutes from the Federal Reserve’s latest meeting showed officials were divided over the prospect of three rate hikes this year.

The S&P 500 rose above 2,700 for the first time, closing up 0.6% at 2,713.06, while the Dow Jones Industrial Average ended just below the 25,000 mark, up 0.4% at 24,922.68 and the Nasdaq increased 0.8% to 7,065.53. Technology, energy and healthcare shares provided much of the upside.

Meanwhile, the dollar was up 0.6% versus the pound at 0.7400, 0.4% higher against the euro at 0.8325 and 0.2% firmer against the yen at 112.52, buoyed by strong data releases.

The Fed hiked rates last month by 0.25% - the third hike of 2017 - and minutes from the 12-13 December meeting released earlier revealed that some officials thought the three 25-basis points rate increases projected for this year might be too aggressive.

The minutes also suggested that the Fed will continue to take a gradual approach to lifting rates, although this could accelerate if the pace of inflation picks up.

In addition, Fed officials discussed the possibility that President Trump’s tax changes could cause inflation pressures to rise.

Rabobank said: “We think that core inflation will continue to remain well below the Fed’s 2% target during most of 2018. Therefore, we expect only two hikes in 2018 instead of the three hikes that are implied by the dot plot. Since the third hike of last year looked like a leap of faith, we think that the Fed will skip March as an opportunity for the first hike in 2018. Instead, we expect one hike in June and another in December.”

Data provided some cheer as the Institute for Supply Management’s headline manufacturing index rose to 59.7 in December from 58.2 in November, beating expectations for a drop to 58.1.

Timothy R. Fiore, chair of the ISM, said: “This indicates growth in manufacturing for the 16th consecutive month, led by strong expansion in new orders and production with hiring growing at a slower rate and supplier deliveries continuing to struggle.”

A reading above 50 indicates expansion, while a reading below signals contraction.

The new orders index increased to 69.4 in December from 64 the month before, marking the highest reading since January 2004, when the index came in at 70.6. Meanwhile, the employment index ticked down to 57 from 59.7 in November and the production index printed at 65.8 from 63.9 a month earlier.

There was more good news on the macro front as figures from the Commerce Department revealed that construction spending rose 0.8% to an all-time high of $1.26trn in November, beating expectations for a 0.5% increase.

Spreadex analyst Connor Campbell said: “The ISM reading joins yesterday’s Markit PMI in suggesting the US manufacturing sector had a very strong end to 2017. This news helped lift a previously flagging dollar, with the greenback taking 0.7% back off the pound and 0.4% off the euro, allowing the currency to ease, if in no way erase, its recent woes.”

In corporate news, Scana surged nearly 23% as it agreed to an all-stock merger with Dominion Energy that values the group at $7.9bn.

Elsewhere, MoneyGram International fell 9% after it and Ant Financial Services said they have ended their merger agreement.