US stocks rise after weaker inflation data bolsters Fed pause hopes

Wall Street stocks rallied on Tuesday after US inflation slowed to the lowest pace in more than two years, bolstering investors’ bets that the Federal Reserve will not raise interest rates this week.

The benchmark S&P 500 rose 0.6 per cent, pushing higher into the bull market territory it entered last week. The tech-heavy Nasdaq Composite also added 0.6 per cent.

The latest US consumer price index report showed headline inflation slowed to 4 per cent year on year in May, down from 4.9 per cent in the previous month, marking its lowest level since March 2021. The figure was slightly below the consensus forecast of economists polled by Reuters.

The data “should cement expectations for the Fed to keep rates unchanged tomorrow but the commentary around the decision is likely to remain hawkish”, said James Knightley, chief international economist at ING.

Markets were pricing in a 92 per cent probability that the Fed would hold interest rates steady on Wednesday, according to data compiled by Refinitiv and based on interest rate derivatives prices.

“The consensus view is that inflation is on a path lower, the economy is slowing but not contracting, and the Fed will chill and reassess in July,” said Mike Zigmont, head of research and trading at Harvest Volatility.

The dollar, which weakens when investors expect lower rates, lost 0.3 per cent against a basket of six peer currencies.

The yield on the US two-year Treasury, which is more sensitive to monetary policy expectations, rose 0.08 percentage points to 4.67 per cent, while the yield on the 10-year note added 0.05 percentage points to 3.81 per cent. Bond yields rise as prices fall.

The moves come a day after the S&P 500 and the Nasdaq reached their highest levels in 14 months.

In Europe, the region-wide Stoxx 600 and France’s CAC 40 ended the day 0.6 per cent higher, while Germany’s Dax climbed 0.8 per cent.

Economists are still confident the European Central Bank will raise its deposit rate by another quarter-percentage point when policymakers meet on Thursday.

In the UK, strong wage data pushed short-term gilt yields above the level reached during the turmoil following former prime minister Liz Truss’s “mini” Budget last autumn, raising the likelihood that the Bank of England will increase rates further.

“With all signs suggesting that inflationary pressures are failing to ease, and may well be rebuilding against the BoE’s expectations, the [labour market] data will send shockwaves through Threadneedle Street,” said Nick Rees, forex market analyst at Monex Europe.

The yield on the two-year gilt rose 0.26 percentage points to 4.89 per cent, compared with the peak of 4.64 per cent in late September.


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