US stocks rise after weaker inflation data bolsters Fed hopes
Wall Street stocks rose on Tuesday after the U.S. inflation rate fell to its lowest level 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 percent, pushing higher into the bull market territory it entered last week. The technology-heavy Nasdaq Composite also returned 0.6 percent.
The latest U.S. consumer price index report showed headline inflation slowed to 4 percent year-on-year in May, down from 4.9 percent the previous month, marking the lowest level since March 2021[ads1]. The figure was slightly below the consensus forecast of economists polled. by Reuters.
The data “should cement expectations that the Fed will keep interest rates unchanged tomorrow, but commentary around the decision is likely to remain hawkish”, said James Knightley, chief international economist at ING.
Markets priced in a 92 percent probability that the Fed would keep interest rates steady on Wednesday, according to data compiled by Refinitiv and based on interest rate derivative prices.
“The consensus view is that inflation is on the way down, the economy is slowing but not contracting, and the Fed will relax 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 percent against a basket of six equivalent currencies.
The yield on the US two-year Treasury, which is more sensitive to monetary policy expectations, rose 0.08 percentage point to 4.67 percent, while the yield on the 10-year note rose 0.05 percentage point to 3.81 percent. Bond yields rise as prices fall.
The moves come a day after the S&P 500 and Nasdaq hit their highest levels in 14 months.
In Europe, the regional Stoxx 600 and France’s CAC 40 ended the day 0.6 percent higher, while Germany’s Dax climbed 0.8 percent.
Economists remain confident that the European Central Bank will increase the deposit rate by another quarter of a percentage point when policymakers meet on Thursday.
In Britain, strong wages data pushed short-term gilt yields above levels reached during the turmoil following former prime minister Liz Truss’s “mini” budget last autumn, increasing the likelihood that the Bank of England will raise rates further.
“With all signs suggesting that inflationary pressures are unable to ease, and may well build up again against the BoE’s expectations, [labour market] data will send shockwaves through Threadneedle Street,” said Nick Rees, currency market analyst at Monex Europe.
The yield on the two-year gilt rose 0.26 percentage points to 4.89 percent, compared with the peak of 4.64 percent at the end of September.
