US Treasuries rally and stocks waver after inflation dips

Treasuries rallied and Wall Street stocks reversed early gains on Wednesday as US inflation data came in slightly weaker than expected, adding to traders’ belief that the Federal Reserve will halt its rate tightening campaign.

The yield on the interest rate-sensitive two-year Treasury fell 0.11 percentage points to 3.91 per cent, while the yield on the 10-year note dropped 0.06 percentage points to 3.45 per cent.

The benchmark S&P 500 was fractionally lower in afternoon trade in New York, with energy stocks leading the decline. The tech-heavy Nasdaq Composite was 0.6 per cent higher, having risen to its highest level since August earlier in the session.

The moves came after data from the US Bureau of Labor Statistics this morning showed the US consumer price index for April eased to 4.9 per cent in April, the lowest annual reading since April 2021 and slightly below forecasts of 5 per cent. The CPI rose 0.4 per cent month on month in April, up from 0.1 per cent in March. Core inflation, which excludes volatile food and energy costs, dipped slightly in April to 5.5 per cent year on year.

The news fuelled investors’ hopes that the Fed’s decision last week to raise its benchmark interest rate to a target range of 5 per cent to 5.25 per cent would mark the end of its monetary tightening campaign. After more than a year of aggressive rate rises, US interest rates are at the highest level since mid-2007.

“This should present the Fed with all it needs now to hit the pause button on the rate rises,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

Traders are pricing in a federal funds rate just above 4.25 in December, according to futures markets, indicating that fears remain that tighter credit conditions could lead to a recession later this year.

Investors are also watching for developments on the US debt ceiling. President Joe Biden on Tuesday implored Republicans to “take the threat of default off the table” after failing to reach a breakthrough in a meeting with congressional leaders.

“The debt-ceiling issue is a very serious one but the markets are not reacting yet, and I stress yet,” said Mike Zigmont, head of trading at Harvest Volatility Management. “If the political brinkmanship gets too dicey, markets are going to freak out. If the US actually defaults, look out below.”

Francesco Pesole, currency strategist at ING, said there was “growing concern that it might actually take a market sell-off in the equity or money markets to break the impasse”.

In Europe, the region-wide Stoxx 600 benchmark fell 0.4 per cent, while London’s FTSE 100 was 0.3 per cent lower.

In Asia, Hong Kong’s Hang Seng index fell 0.5 per cent, and China’s CSI 300 lost 0.8 per cent.

China’s import volume contracted by the most in a year last month, while exports expanded at a slower pace than expected, heightening concerns over the pace of the country’s economic recovery since Beijing ditched strict zero-Covid measures in late 2022.

“The downturn in Chinese exports may still have some way to run before bottoming out later this year,” said Zichun Huang, China economist at Capital Economics.