U.S. stocks rise after weak inflation bolsters confidence on Fed pause

Wall Street stocks hit a new 14-month high on Tuesday as the pace of U.S. inflation eased to its lowest level in more than two years, reinforcing investors’ bets that the Federal Reserve will not raise interest rates this week.

The benchmark S&P 500 index rose 0.7 percent, pushing back into bull market territory it entered last week. The tech-heavy Nasdaq composite also added 0.8 percent.

The latest U.S. consumer price index report showed the U.S. consumer price index fell to an annualized 4 percent in May, down from 4.9 percent in the previous month, marking its lowest level since March 2021. By Reuters.

The data “should confirm expectations that the Fed will keep rates unchanged tomorrow, but the commentary surrounding the decision will be voluminous,” said James Knightley, chief international economist at ING.

Markets were pricing in a 93 percent probability that the central bank will keep interest rates steady at the end of its monetary policy meeting on Wednesday, based on prices compiled by Refinitiv and interest rate derivatives.

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

The dollar lost 0.3 percent against a basket of six peers, weakening as investors awaited lower rates.

The yield on the US two-year Treasury note, more sensitive to monetary policy expectations, rose 0.08 percentage points to 4.67 percent, while the yield on the 10-year note added 0.05 percentage points to 3.83 percent. As prices fall, bond yields rise.

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In Europe, the regional Stoxx 600 and France’s CAC 40 ended the day up 0.6 percent, while Germany’s Dax rose 0.8 percent.

Economists are still optimistic that the European Central Bank will raise its deposit rate by another quarter of a percentage point when policymakers meet on Thursday.

In the UK, stronger wages data pushed short-term gilt yields above levels reached during the turmoil following former prime minister Liz Truss’s “mini” budget last autumn, raising the prospect of a further increase in Bank of England rates.

“All signs suggest that inflationary pressures have failed to ease and may be building again against the BoE’s expectations. [labour market] The data will send shockwaves through Threadneedle Street,” said Nick Rees, forex market analyst at Monex Europe.

The two-year gilt yield rose 0.26 percentage points to 4.89 percent, compared with a peak of 4.64 percent in late September.

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