European stocks and Wall Street futures rose after US inflation came in lower than expected on Tuesday, boosting the likelihood that the Federal Reserve will not raise interest rates this week.
Contracts tracking the S&P 500 signalled that the index will open 0.3 per cent higher, while those tracking the tech-heavy Nasdaq 100 added 0.6 per cent ahead of the New York open.
The latest US consumer price index report showed that headline inflation slowed to 4 per cent year on year in May, marking its lowest level since March 2021 and a decline from the 4.9 per cent in the previous month.
The figure was slightly below the consensus forecast of economists polled by Reuters, and signalled that the Fed’s tightening campaign was beginning to take effect, offering policymakers an opportunity to pause.
Investors thought there was a 95 per cent chance that the Fed would resist raising interest rates when it meets on Tuesday and Wednesday, compared with 77 per cent just before the data release.
“The consensus view is that inflation is on a path lower, the economy is slowing but not contracting, and the Fed will chill and reassess in July,” said Mike Zigmont, head of research and trading at Harvest Volatility.
The yield on the US two-year Treasury, which is more sensitive to monetary policy expectations, fell 0.07 percentage points to 4.52 per cent, while the yield on the 10-year note was also down 0.07 percentage points at 3.69 per cent. Bond yields fall as prices rise.
The dollar, which weakens when investors expect lower rates, lost 0.4 per cent against a basket of six peer currencies.
The moves come a day after Wall Street rallied, with the benchmark S&P 500 rising 0.9 per cent and reaching its highest point since last April. The Nasdaq Composite added 1.5 per cent to its highest level in 14 months.
Meanwhile, Europe’s region-wide Stoxx 600, France’s Cac 40 and Germany’s Dax all climbed 0.3 per cent.
Traders also took heart after the ZEW Institute’s economic sentiment index for Germany came in at minus 8.5 in June, improving from minus 10.7 in the previous month, and landing well above the consensus forecast of minus 13.1.
Economists are still confident that the European Central Bank will raise its deposit rate by another quarter-percentage point when policymakers meet on Thursday.
In the UK, strong wage data pushed short-term gilt yields above the level reached during the turmoil following Liz Truss’s “mini” Budget last autumn, raising the likelihood that the Bank of England will increase rates further.
“With all signs suggesting that inflationary pressures are failing to ease, and may well be rebuilding against the BoE’s expectations, the [labour market] data will send shockwaves through Threadneedle Street,” said Nick Rees, FX market analyst at Monex Europe.
The yield on the two-year gilt rose 0.15 percentage points to 4.80 per cent, compared with the peak of 4.64 per cent in late September.
Asian equities rose on Tuesday, with Chinese stocks advancing after the People’s Bank of China reduced its seven-day reverse repurchase rate by 0.1 percentage point in an effort to boost short-term liquidity.
Hong Kong’s Hang Seng index rose 0.6 per cent and China’s CSI 300 was 0.5 per cent higher. Japan’s Topix added 1.2 per cent and South Korea’s Kospi gained 0.3 per cent.
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