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US stocks and Treasuries rallied while the dollar tumbled after inflation fell more than expected in June, easing pressure on the Federal Reserve to keep raising interest rates.
Wall Street’s benchmark S&P 500 stock index closed 0.7 per cent higher on Wednesday at its highest level since April 2022, propelled by the tech and utilities sectors. The tech-heavy Nasdaq Composite gained 1.2 per cent.
The yield on the two-year Treasury note, which tracks interest rate expectations, was down 0.16 percentage points to 4.74 per cent. The yield on the 10-year note fell 0.12 percentage points to 3.86 per cent. Yields move inversely to prices.
Meanwhile, an index tracking the dollar’s strength against a basket of six peers fell 1.2 per cent to the lowest level in 15 months.
The moves came after data showed that US inflation slowed to 3 per cent, its lowest level on an annual basis since March 2021. Economists polled by Reuters had forecast a decline to 3.1 per cent.
“Core” inflation, which strips out volatile food and energy prices, slowed to an annual rate of 4.8 per cent in June, also below forecast, from 5.3 per cent.
“There are various ways of torturing the data . . . But everything is pointing to a deceleration in the momentum of inflation,” said Sebastian Vismara, a global macroeconomist and strategist at BNY Mellon Investment Management.
“Any way you cut it, this release is positive for the Fed and the market,” Vismara added.
Neil Birrell, chief investment officer at Premier Miton, said: “The chances of the Fed pulling off what many thought was impossible are rising: growth is robust and inflation is falling.”
Markets still expect the Fed to raise rates by 0.25 percentage points when the central bank meets at the end of this month after forgoing an increase for the first time in more than a year in June. Traders expect the central bank to pause after the July meeting at a range of between 5.25 per cent and 5.5 per cent.
“I think the Fed has done enough,” said Jason Ware, chief investment officer at Albion Financial. “Going from 0 per cent to 5 plus per cent in 14, 15 short months, plus doing [quantitative tightening], as well as stress in the regional banking system this spring . . . all of those things are going to take time to truly show up in the economy.”
Investors are split over whether the US can avoid a recession. “Think of the economy and the markets as coming to a fork in the road, with one path headed towards a soft landing and its corresponding positive market implications, and the opposite for the other path ending in a recession,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.
Across the Atlantic, Europe’s region-wide Stoxx 600 advanced 1.5 per cent, while France’s Cac 40 gained 1.6 per cent. London’s FTSE 100 rose 1.8 per cent.
Asian markets were mixed. China’s CSI 300 and Japan’s Topix both fell 0.7 per cent, but Hong Kong’s Hang Seng index rose 1.1 per cent and Korea’s Kospi added 0.5 per cent.
In commodity markets, Brent crude oil rose above $80 a barrel for the first time since May, as deep production cuts by Opec+ and expectations of a growing supply gap in the second half of this year lifted prices out of their recent range.
Additional reporting by Nicholas Megaw in New York
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