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Global Shares Rally as U.S. Inflation Data Eases, Dollar Weakens

In response to U.S. consumer price data indicating a minimal rise in May, global shares rallied while the dollar weakened on Tuesday. The data suggested that inflation remained subdued, increasing expectations that the Federal Reserve would pause interest rate hikes after its two-day meeting. Although underlying price pressures remain strong, the report suggested that inflation may not easily cool down, leaving the door open for a future rate hike.

Dollar Weakens

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Equities, particularly in the tech sector, experienced a surge, with the Nasdaq up almost 30% year-to-date. However, concerns arose about a rally driven primarily by a handful of mega-cap stocks, leading to comparisons with the dot-com boom and subsequent bust. While some market participants questioned the sustainability of the rally, others speculated on the catalyst that could trigger a reversal.

inflation

The S&P 500 and Nasdaq reached new one-year highs, contributing to a 0.84% increase in MSCI’s U.S.-centric stock gauge for the day and an 11.8% gain for the year. In Europe, the STOXX 600 index closed up 0.55%, while on Wall Street, the Dow Jones Industrial Average rose 0.43%, the S&P 500 gained 0.69%, and the Nasdaq Composite increased by 0.83%.

Market expectations of the Federal Reserve maintaining its target rate unchanged rose to 91.9% for the current meeting, while the likelihood of a rate hike at the subsequent meeting in July reached 60.1%, according to CME Group’s FedWatch Tool. The decision on future rate hikes will be influenced by the strength of the economy rather than inflation alone.

The dollar index, measuring the U.S. currency against six peers, declined by 0.28% due to falling rate differentials ahead of anticipated rate hikes by the European Central Bank and potentially the Bank of England. The Bank of Japan is expected to maintain its loose monetary policy. The euro and sterling both gained against the dollar, while the yen weakened.

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The benchmark 10-year Treasury yield initially declined but then rose by 5.6 basis points to 3.821% following the release of inflation data. Meanwhile, the Bank of England faced a challenge as UK wage growth showed a rapid pickup in the three months leading up to April, adding complexity to their inflation management.

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Oil prices recovered over 3% after China’s central bank lowered a short-term lending rate for the first time in 10 months. U.S. crude settled at $69.42 a barrel, up $2.30, while Brent settled at $74.29 a barrel, up $2.45. Gold slipped as Treasury yields rebounded, with U.S. gold futures settling 0.6% lower at $1,958.60 an ounce. Traders solidified their bets on the Fed maintaining interest rates without change.