Wall Street stocks hit fresh 14-month highs on Tuesday after the U.S. inflation rate fell to its lowest level in more than two years, bolstering investor bets that the Federal Reserve will not raise interest rates this week.
The benchmark S&P 500 rose 0.7%, pushing higher into the bull market territory it entered last week. The tech Nasdaq Composite also added 0.8%.
The latest U.S. consumer price index report showed headline inflation slowed to 4 percent year-on-year in May, down from 4.9 percent the previous month, marking its lowest level since March 2021. The figure was slightly below the consensus forecast of economists polled by Reuters.
The data “should reinforce expectations that the Fed will keep rates unchanged tomorrow, but commentary around the decision is likely to remain hawkish,” said James Knightley, chief international economist at ING.
Markets were pricing in a 93 percent chance the Fed would keep interest rates steady at the end of its monetary policy meeting on Wednesday, according to data compiled by Refinitiv and based on interest rate derivatives prices.
“The consensus view is that inflation is on a lower path, the economy is slowing but not contracting, and the Fed will cool and reassess in July,” said Mike Zygmont, head of research and trading at Harvest Volatility.
The dollar, which has weakened as investors expect lower interest rates, lost 0.3 percent against a basket of six currencies.
The yield on two-year U.S. Treasuries, which is more sensitive to monetary policy expectations, rose 0.08 percentage point to 4.67 percent, while the 10-year yield added 0.05 percentage point to 3.83 at hundred. Bond yields rise as prices fall.
In Europe, the regional Stoxx 600 and France’s CAC 40 ended the day 0.6% higher, while Germany’s Dax rose 0.8%.
Economists are still confident that the European Central Bank will raise its deposit rate by another quarter of a percentage point when policymakers meet on Thursday.
In the UK, strong wages data pushed short-term gold yields above the level reached during the turmoil following former prime minister Liz Truss’ “mini” budget last autumn, raising the prospect of a further rate hike by the Bank of England.
“With all signs suggesting inflationary pressures are not abating and perhaps rebounding against BoE expectations, the (labour market) data will send shockwaves through Threadneedle Street,” said Nick Rees, FX market analyst at Monex Europe .
The yield on two-year gilts rose 0.26 percentage points to 4.89 percent, compared with a peak of 4.64 percent in late September.