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Stocks rally as U.S. inflation data trends lower, bond yields slide


Stocks wavered, oil prices initially recovered and bond yields slid on Wednesday after data showed U.S. consumer prices in April rose at a slower-than-expected pace, evidence that the Federal Reserve has been succeeding in its inflation fight.

The Consumer Price Index rose 0.4% after gaining 0.1% in March, the Labor Department said, while in the 12 months through April, the CPI increased 4.9% after advancing 5.0% on a year-on-year basis in March.

Futures showed the probability that the Fed will raise rates again in June slid to 13.1% from 21.9% shortly before the data’s release, according to CME Group’s FedWatch Tool. The likelihood the Fed cuts rates later this year increased.

Shelter, a big component of CPI, came in a bit weaker, giving markets relief as some people were looking for a stronger number, said Priya Misra, head of Global Rates Strategy at TD Securities in New York.

“There’s a big caveat, it came in weaker because of hotels and not because of rents,” Misra said. “The market may be rejoicing here that inflation is on the way down. It is, but we just think it’s going to be a little bit sticky on the way down,” she said, adding “the market may give it back.”

The two-year Treasury yield, which typically moves in step with rate expectations, slid from about 4.05% before the news and last traded down 8.7 basis points at 3.937%.

The dollar retreated as the data reinforced expectations the Fed will pause its interest rate hikes to curb high inflation, while crude oil futures gave up initial gains on the data on concerns a rise in U.S. inventories showed weakening demand.

The dollar index lower 0.108%, while the euro rose 0.1% to $1.0971.

Equity markets initially rose as the CPI data suggested the Fed’s most aggressive rate hikes in four decades were yielding results.

MSCI’s gauge of stocks across the world (.MIWD00000PUS) edged down 0.06%, while stocks on Wall Street wavered after an early rally.

The Dow Jones Industrial Average (.DJI) fell 0.42%, the S&P 500 (.SPX) gained 0.03% and the Nasdaq Composite (.IXIC) added 0.57%.

In Europe, the pan-European STOXX 600 index (.STOXX) lost 0.41%.

John Leiper, chief investment officer at Titan Asset Management, said the market reacted positively as it’s “hyper fixated on the ‘pause,’ but a pause is still restrictive overall.”

Headwinds still loom for the world’s biggest economy, 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.

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 (.MIEM00000CUS) up 0.15%.

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 the market rebound from the reopening of the economy is fading into an uneven recovery.

Hong Kong’s Hang Seng 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 (3908.HK) stopped using consultancy Capvision.

U.S. crude recently fell 2.06% to $72.19 per barrel and Brent was at $76.00, down 1.86% on the day.

Spot gold fell about 2% to $2,030.39 an ounce.

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