The US markets closed lower on Wednesday, with the S&P 500 and Nasdaq logging their first decline in 2018, as traders kept an eye on US bonds following an accelerated rise in the yield on the 10-year Treasury note, prompted by a report that China is considering halting purchases of US debt. After the record run, Wednesday's pullback was seen as merely a pause in the rally as traders took the chance to take some profits. A media report that Canada is expecting President Donald Trump to shortly announce an end to the North American Free Trade Agreement also weighed on sentiment. St. Louis Fed President James Bullard said that sub-par inflation over the past five years has cost the US economy nearly $1 trillion in nominal growth, as he fleshed out a proposal for a more dynamic system of setting price increase goals. Bullard added that the Fed's inability to get inflation to its target over the past five years has allowed a 4.6 percent gap to emerge in where the economy, measured in nominal terms before adjusting for price increases, would have been otherwise. That amounts to more than $820 billion in an $18 trillion economy. To compensate, the Fed would have to allow annual inflation of 2.5 percent for a decade - a sign of just how large the gap has become but also of how aggressive the central bank would have to be in its commitment to make up for it.
On the economy front, the cost of goods imported into the US rose slightly in December and finished the year with a 3% increase - the biggest gain in six years. Although that's much higher than the 1.9% gain in 2016, it still reflects a generally low level of inflation. In December, import prices edged up a scant 0.1% after a big oil-inspired increase in the prior month. Minus energy import prices fell 0.1%. Export prices fell 0.1% in December, the government said. They rose 2.6% for all of 2017. The cost of oil and other forms of energy rose more slowly in December. Energy prices have a big impact on overall import inflation and they largely account for the increase in 2017.
Meanwhile, US wholesale inventories rose slightly more than initially estimated in November, suggesting that inventory investment will probably contribute to economic growth in the fourth quarter. The Commerce Department said that wholesale inventories rebounded 0.8 percent after dropping 0.4 percent in October. The department reported last month that wholesale inventories jumped 0.7 percent in November. The component of wholesale inventories - that goes into the calculation of gross domestic product - wholesale stocks excluding autos - also increased 0.8 percent in November.
The Dow Jones Industrial Average lost 16.67 points or 0.07 percent to 25,369.13, the Nasdaq dropped 10.006 points or 0.14 percent to 7,153.57, and the S&P 500 edged lower by 3.06 points or 0.11 percent to 2,748.23.