By Lawrence White
LONDON (Reuters) – Stocks edged up, oil prices recovered and bond yields fell on Wednesday after data showed U.S. consumer prices rose at a slightly slower-than-expected pace last month, evidence that the Federal Reserve was succeeding in its fight against inflation.
MSCI’s gauge of global equity performance rose 0.03% after the Labor Department’s Consumer Price Index (CPI) rose 4.9% year-over-year in April, against expectations of 5%.
The odds favouring a ‘pause’ in rate hikes in June sharply increased after the data, sending Dow e-minis up 78 points, or 0.23%, while S&P 500 e-minis rose 14.75 points having been down before the key data release.
“Markets are reacting positively, with a drop in short-term rates and a pick-up in equity futures,” said John Leiper, Chief Investment Officer at Titan Asset Management.
“Bigger picture, I think the market is hyper-fixated on the ‘pause’ but a pause is still restrictive overall,” he said.
U.S. and Brent oil futures likewise turned positive having fallen as much as $1 in earlier trading, on concerns a rise in U.S. inventories showed weakening demand.
Economists had expected the headline CPI to hold steady at an annual 5% and core CPI to moderate very slightly to 5.5%, with anything stickier seen as likely to confound bets interest rates will fall.
The dollar index hit a session low of 101.36 after the headline April inflation data, while benchmark 10-year German bond yields edged down 4 basis points.
The broad-based rally across asset classes showed investors relieved that the U.S. is making progress in the battle against inflation which has roiled markets worldwide this year.
Problems still loom in the world’s biggest economy, however, with lawmakers at an impasse over the approaching U.S. debt ceiling.
President Joe Biden and top lawmakers failed to break a deadlock over raising the $31.4 trillion U.S. debt limit but vowed to meet again before June when the Treasury projects it will start struggling to meet its obligations.
Two-year Treasury yields fell to 3.9389%.
Foreign exchange markets had been treading water while markets weighed policymakers’ rhetoric against traders’ conviction that U.S. interest rates should fall.
Emerging markets currencies rallied on Wednesday following the U.S. data, with MSCI’s index up 0.26%.
European Central Bank board member Isabel Schnabel said on Tuesday expectations for rate cuts were misplaced, but that didn’t give the euro much of a boost, as traders had been reluctant to sell dollars too hard ahead of the CPI data.
China’s weak import figures for April held down Chinese and Hong Kong stocks for a second straight session, as investors fret that the market rebound from the reopening of the economy is fading into an uneven recovery.
Hong Kong’s Hang Seng fell 0.5%. The Shanghai Composite dropped 1.3% and the yuan fell to a two-week trough.
An apparent crackdown on due diligence firms is roiling the sector and unnerving investors. Reuters reported CICC Capital, a unit of leading Chinese investment bank China International Capital Corp stopped using consultancy Capvision.
Spot gold turned positive after the CPI data, last trading up 0.3%.