By Herbert Lash
NEW YORK, April 12 (Reuters) – Government bonds and a gauge of global stocks rose on Wednesday after data showed cooler-than-expected headline inflation in March, suggesting the Federal Reserve may pause monetary tightening following one more rate hike next month.
U.S.consumer prices barely rose as the cost of gasoline declined 4.6%, but stubbornly high rents kept underlying inflation simmering, likely ensuring that the Fed will raise interest rates after policymakers meet on May 2-3.
Gold prices rose and the dollar fell after the Consumer Price Index (CPI) climbed 0.1% last month, or half the rate of market expectations, after advancing 0.4% in February.
But inflation is still running well above the Fed’s 2% target, causing market angst as investors try to assess when the central bank might pause its hiking campaign to slow inflation.
Stocks on Wall Street initially rose, but the S&P 500 and Nasdaq later dipped after minutes from the U.S.central bank’s policy meeting in March showed several Fed officials concluded high inflation remained the central bank’s priority.
The officials had considered pausing rate increases until it was clear the failure of two regional banks would not cause wider financial stress.
“Right now the conversation is all about when the Fed starts to move in a different direction,” said Johan Grahn, head ETF market strategist at Allianz Investment Management in Minneapolis.
“I don’t think the Fed will move until it’s painful enough that people are going to shy away from placing their chips on the equity market,” he said.
Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, said the CPI data confirms that inflation trends are moving in the right direction.
“But from the market’s perspective, it might be getting ahead of itself because I don’t think the Fed will be cutting rates this year,” Saglimbene said about investor sentiment.
“At some point, investors are going to have to grapple with the idea that rates are going to stay higher for longer this year, and that could create some tension for stocks down the road,” he said.
Money markets initially trimmed expectations for a Fed rate hike in May, pricing in a 65.2% chance of a 25-basis-point move, versus 72.9% on Tuesday, CME Group’s FedWatch Tool showed.But the probability of a hike in May later rose to 70.5%.
Markets still are pricing the Fed to cut its target rate to 4.334% by December, slightly less than the day before, as the economy slows and potentially enters a recession.
FEDWATCH
With core CPI, which excludes volatile food and energy components, rising 5.6% after a 5.5% rise in February, markets were leaning towards further tightening.
Inflation may be falling but it has yet to do so at a rate commensurate with the Fed’s 2% goal, Richmond Fed President Thomas Barkin said in remarks that threw cold water on the market’s initial exuberance over the CPI data on Wednesday.
“I’m waiting for inflation to crack,” Barkin told broadcaster CNBC.”It’s moving in the right direction…but in the absence of a month or two months or three months with inflation at our target, it’s hard to make the case that we’re compellingly headed there.”
Markets saw a brighter outlook in Canada after the Bank of Canada left its key overnight interest rate on hold at 4.50% as expected and raised its growth forecast for 2023, while dropping language warning of a potential recession.
The Canadian dollar strengthened against the greenback.
European Central Bank policymakers made the case for more rate hikes on Wednesday but offered contrasting views on just how much more tightening is needed, suggesting that the debate over the bank’s next move is not yet settled.
MSCI’s gauge of stocks across the globe <.MIWD,00000PUS> gained 0.08%, while the pan-European STOXX 600 index .STOXX rose 0.13%.
On Wall Street, the Dow Jones Industrial Average .DJI fell 0.1%, the S&P 500 .SPX lost 0.28% and the Nasdaq Composite .IXIC dropped 0.57%.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was 0.16% lower in choppy trading, snapping a three-day winning streak.
BONDS UP, DOLLAR DOWN
U.S.
bond yields fell after the CPI numbers.Rate-sensitive two-year Treasury yields US2YT=RR fell 9.6 basis points to 3.962% and the 10-year US10YT=RR slid 2.5 basis points to 3.409%.
The dollar fell with an index measuring the U.S.currency against six rivals =USD down 0.617%.The euro EUR= rose 0.76% to $1.0993 and the yen strengthened 0.43% versus the greenback at 133.09 per dollar.
China shares were mixed, with the Shanghai Composite Index .SSEC up 0.4% while Hong Kong’s Hang Seng Index .HSI slipped 0.9% as investors weighed rising geopolitical tensions.
Elsewhere, U.S.crude CLc1 rose $1.73 to settle at $83.26 a barrel, while Brent LCOc1 settled up $1.72 at $87.33.
U.S.
gold futures GCv1 settled 0.3% higher at $2,024.90 an ounce.
Bitcoin BTC=BTSP fell 1.01% to $29,941.00.
World FX rates YTD
Asian stock markets
(Reporting by Herbert Lash, additional reporting by Ankur Banerjee, Yoruk Bahceli, Dhara Ranasinghe; Editing by Raissa Kasolowsky, Angus MacSwan and Nick Zieminski)
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