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US stocks and bonds jump after inflation falls more than forecast

Wall Street stocks and US government debt rallied on Wednesday 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 rose 1 per cent to its highest level since April 2022, while the tech-heavy Nasdaq Composite gained 1.4 per cent.

The yield on the two-year Treasury note, which tracks interest rate expectations, fell 0.15 percentage points to 4.74 per cent, a two-week low. Yields move inversely to prices.

Meanwhile, an index tracking the dollar’s strength against a basket of six peers fell 1 per cent to the lowest level in 15 months as traders priced in a lower chance of rate rises later this year.

Those moves came after US consumer prices increased at an annual rate of 3 per cent last month, down from 4 per cent in May, data from the Bureau of Labor Statistics showed. That marked the smallest 12-month increase since March 2021. Economists polled by Reuters had forecast a decline to 3.1 per cent. 

Core CPI, 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 — you can take ‘core core’ inflation, ‘core services excluding housing’ or some of the other measures like ‘core ex-housing and used cars’. 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 skipping an increase for the first time in more than a year in June. The market-assigned probability of further rises fell following Wednesday’s inflation figures.

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 1.7 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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