Stock rally, yields fall as US CPI data reassures investors

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© Reuters. FILE PHOTO: A passerby wearing a protective mask is silhouetted in front of a screen of blank prices on a stock exchange listing after the Tokyo Stock Exchange temporarily suspended all trading amid coronavirus disease (COVID-19) due to system problems

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By Herbert Lash and Simon Jessop

NEW YORK / LONDON (Reuters) – Global stocks rose and bond yields were subdued Thursday after a surge in US inflation was deemed not enough to change the Federal Reserve’s view that rising consumer prices will be temporary or ease Change monetary policy.

MSCI’s benchmark, the and a major European index, rose to record highs after the US Department of Labor announced that the consumer price index accelerated 5.0% in the twelve-month month ending May, the largest year-on-year increase since August 2008.

As a sign of market complacency, the US 10-year Treasury yield fell 1.2 basis points to 1.4772% after rising above 1.5% after the data was released. What was traded changed little.

The initial sell-off in bonds was subdued as the CPI report was largely in line with expectations, said Subadra Rajappa, head of US interest rate strategy at Societe Generale (OTC 🙂 in New York.

“The market is really buying into the narrative that the rise in inflation is actually temporary because you don’t see that it is necessarily priced into bond market fears,” said Rajappa.

Many investors believe economic growth will soon slow, perhaps significantly, and trump any acceleration in inflation that will be temporary, said Joseph LaVorgna, chief economist for America at Natixis in New York.

“If the economy turns out to be weaker than people think for the next three to six months, it doesn’t matter if inflation continues to surprise upside,” LaVorgna said.

“The (stock) market will ignore the data. He’ll recover anyway, ”he said.

MSCI’s All Country World Index rose 0.35% to 718.05 after breaking its previous high of 718.19 Tuesday, and the pan-European index closed 0.1% at 454.83, having previously hit a new high.

On Wall Street, the price rose 0.35%, the S&P 500 gained 0.45% and gained 0.49%.

Risk-weighted assets remain buoyant as central banks on both sides of the Atlantic signal their willingness to hold the money taps open until the pandemic recovery takes hold, believing that inflationary pressures will be short-lived.

A surprisingly strong US inflationary pressures in April startled investors and sparked a cautious run into Thursday’s May data.

The European Central Bank raised its growth and inflation forecasts, but vowed to continue to provide ample stimulus as it feared that pulling back now would accelerate a worrying rise in borrowing costs and stall the recovery.

The dollar index fell 0.064% and the euro 0.05% to $ 1.2172. The Japanese yen gained 0.13% against the greenback to 109.48 per dollar.

Bond markets were the big drivers overnight, with some analysts pointing to a setback to further US stimulus efforts while others suggested a likely unwinding of short US Treasuries ahead of the CPI in May.

According to last week’s positioning data from JP Morgan, short Treasury positions were the highest since 2018.

(Additional reporting by Swati Pandey in Sydney and Thyagu Adinarayan in London; editing by Ana Nicolaci da Costa, Christopher Cushing, Angus MacSwan, Catherine Evans and Jane Merriman)

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