Wednesday, July 17, 2024

US stocks rise after weaker inflation bolsters Fed pause hopes

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Wall Road shares hit contemporary 14-month highs on Tuesday after the tempo of US inflation eased to its lowest stage in additional than two years, bolstering traders’ bets that the Federal Reserve is not going to elevate rates of interest this week.

The benchmark S&P 500 index rose 0.7 per cent, pushing larger into the bull market territory it entered final week. The tech-heavy Nasdaq Composite additionally added 0.8 per cent.

The most recent US shopper value index report confirmed headline inflation slowed to 4 per cent yr on yr in Might, down from 4.9 per cent within the earlier month, marking its lowest stage since March 2021. The determine was barely under the consensus forecast of economists polled by Reuters.

The info “ought to cement expectations for the Fed to maintain charges unchanged tomorrow however the commentary across the resolution is more likely to stay hawkish”, mentioned James Knightley, chief worldwide economist at ING.

Markets have been pricing in a 93 per cent chance that the Fed would maintain rates of interest regular on the conclusion of its financial coverage assembly on Wednesday, in accordance with knowledge compiled by Refinitiv and primarily based on rate of interest derivatives costs.

“The consensus view is that inflation is on a path decrease, the financial system is slowing however not contracting, and the Fed will chill and reassess in July,” mentioned Mike Zigmont, head of analysis and buying and selling at Harvest Volatility.

The greenback, which weakens when traders anticipate decrease charges, misplaced 0.3 per cent in opposition to a basket of six peer currencies.

The yield on the US two-year Treasury notice, which is extra delicate to financial coverage expectations, rose 0.08 proportion factors to 4.67 per cent, whereas the yield on the 10-year notice added 0.05 proportion factors to three.83 per cent. Bond yields rise as costs fall.

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

Economists are nonetheless assured the European Central Financial institution will elevate its deposit fee by one other quarter-percentage level when policymakers meet on Thursday.

Within the UK, robust wage knowledge pushed short-term gilt yields above the extent reached in the course of the turmoil following former prime minister Liz Truss’s “mini” Finances final autumn, elevating the chance that the Financial institution of England will enhance charges additional.

Line chart of Two-year gilt yield (%) showing UK short-term borrowing costs breach 'mini' Budget levels

“With all indicators suggesting that inflationary pressures are failing to ease, and could be rebuilding in opposition to the BoE’s expectations, the [labour market] knowledge will ship shockwaves by way of Threadneedle Road,” mentioned Nick Rees, foreign exchange market analyst at Monex Europe.

The yield on the two-year gilt rose 0.26 proportion factors to 4.89 per cent, in contrast with the height of 4.64 per cent in late September.

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