Treasuries rallied and Wall Street stocks rose on Wednesday as US inflation data came in slightly weaker than expected, boosting traders’ belief that the Federal Reserve will halt its rate-hiking campaign.
The yield on the interest-sensitive two-year government bond fell 0.11 percentage point to 3.91 percent, while the yield on the 10-year bond fell 0.07 percentage point to 3.44 percent.
The tech-heavy Nasdaq Composite rose 1 percent to close at its highest level since June. Lower interest rates make companies promising long-term growth more attractive. Meanwhile, the blue-chip S&P 500 index ended a choppy day of trading up 0.4 percent.
The moves come after data from the US Bureau of Labor Statistics this morning showed the US April CPI fell to 4.9 percent in April, the lowest annual reading since April 2021 and slightly below forecasts of 5 percent. CPI rose 0.4 percent mom in April, up from 0.1 percent in March. Core inflation, which excludes fluctuating food and energy costs, eased slightly year-on-year to 5.5 percent in April.
The news fueled investor hopes that the Fed’s decision last week to raise its benchmark interest rate to a target range of 5% to 5.25% would mark the end of its monetary tightening campaign. After more than a year of aggressive rate hikes, US interest rates are at their highest levels since mid-2007. Investors are expecting rate cuts of almost three quarters of a point by the end of the year.
“This should give the Fed what it needs now to hit the pause button on rate hikes,” said Richard Carter, head of fixed interest research at Quilter Cheviot.
Traders are pricing in a federal funds rate just above 4.25 percent in December, according to futures markets, suggesting lingering fears tighter credit conditions could lead to a recession later this year.
Investors are also paying attention to the development of the US debt ceiling. President Joe Biden on Tuesday implored Republicans to “take the risk of a default off the table” after failing to make a breakthrough at a meeting with congressional leaders.
“The debt ceiling issue is very serious, but markets aren’t reacting yet, and I’m not emphasizing yet,” said Mike Zigmont, trading director at Harvest Volatility Management. “When political risk gets too hot, markets panic. If the US does default, see below.”
Francesco Pesole, currency strategist at ING, said there are “growing concerns that it may actually take a sell-off in equity or money markets to break the impasse”.
In Europe, the regional benchmark Stoxx 600 fell 0.4 percent, while London’s FTSE 100 fell 0.3 percent.
In Asia, Hong Kong’s Hang Seng Index fell 0.5 percent and China’s CSI 300 lost 0.8 percent.
China’s import volumes last month shrank by the most in a year, while exports expanded at a slower-than-expected pace, adding to concerns about the pace of the country’s economic recovery since Beijing dropped strict zero-Covid measures in late 2022.
“The slowdown in Chinese exports may still have some time before bottoming out later this year,” said Zichun Huang, China economist at Capital Economics.
Comments are closed.