Wall Street stocks rallied and the dollar dropped on Wednesday as fresh data showed price pressures easing in the US, bolstering investors’ bets that the Federal Reserve will not raise rates later in the session.
The benchmark S&P 500 rose 0.3 per cent, extending its rally from the previous session, while the tech-heavy Nasdaq Composite added 0.4 per cent.
The moves came after the US producer price index rose 1.1 per cent year on year in May, which was less than the consensus forecast and below the 2.3 per cent increase recorded in the previous month.
“Wednesday’s PPI confirms that inflation continues to decelerate and puts even more pressure on the Federal Reserve to pause its interest rates hikes,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.
Markets were pricing in a 92 per cent probability that the Fed would hold interest rates steady at the conclusion of its monetary policy meeting on Wednesday, according to data compiled by Refinitiv and based on interest rate derivatives prices.
The dollar, which weakens when investors expect lower rates, lost 0.6 per cent against a basket of six peer currencies, reaching its lowest level in four weeks.
“Our expectation is that the Fed will leave rates unchanged, in line with market pricing,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. “However, we also expect policymakers to send a clear message to markets that at least one more rate hike is likely at a later meeting.”
A day earlier, the US consumer price data showed headline inflation had also slowed, to a year-on-year rise of 4 per cent in May, down from almost 5 per cent in April.
“The Fed wants to pause and would need a significant reason to alter that view,” said Mohit Kumar, chief Europe financial economist at Jefferies, noting that the inflation report “did not provide that reason”.
The yield on the US two-year Treasury, which is most sensitive to monetary policy expectations, slipped 0.07 percentage points to 4.62 per cent, while the yield on the 10-year note was down 0.05 percentage points at 3.78 per cent. Bond yields fall as prices rise.
Meanwhile, Europe’s region-wide Stoxx 600 and Germany’s Dax both rose 0.5 per cent.
Sterling climbed to its highest level against the dollar since April 2022 after strong UK GDP and labour data this week boosted chances that the Bank of England would keep raising interest rates. The pound gained 0.6 per cent, rising to $1.2698, according to Refinitiv data.
Asian equities were mixed, with Japan’s benchmark Topix index rising 1.3 per cent, while China’s CSI 300 index was flat and Hong Kong’s Hang Seng index lost 0.6 per cent.
Shares in China were buoyed earlier in the day by growing hopes for policy support from the People’s Bank of China after the central bank lowered its short-term lending rate on Tuesday for the first time in nine months.
Analysts at Goldman Sachs said the move “could suggest the start of additional monetary policy easing” and expected the PBoC to cut its one-year medium-term lending facility rate on Thursday by 0.1 percentage points. The rate serves as the floor for China’s benchmark prime loan rate.
