Global shares edged higher and the dollar held near three-week lows on Wednesday as traders were all but certain that the U.S. Federal Reserve will refrain from hiking interest rates later in the session.
Overnight, the much-watched U.S. CPI report showed prices barely rose in May, with just a 0.1 percent increase from the prior month. On an annual basis, consumer prices rose 4 percent, the smallest in more than two years, slowing from April’s 4.9 percent.
That has crystallised traders’ views that the Fed is unlikely to hike rates later on Wednesday. They now see more than a 90 percent chance of the bank staying put.
Expecting a pause global stock markets were in an upbeat mood. The pan-regional Euro Stoxx 600 index was up 0.5 percent by 0910 GMT. S&P 500 futures and Nasdaq futures were both up 0.2 percent, setting Wall Street for further gains after U.S. stocks rallied to 14-month highs overnight.
“Having already flagged the possibility of a pause I think it’s unlikely that (the Fed) would veer off course at this particular juncture,” said Richard McGuire, head of rates strategy at Rabobank in London.
“They do clearly appear to be approaching this on a somewhat cautious basis given the elevated level of uncertainty. The CPI data yesterday was pretty much bang in line so nothing there to challenge this outlook.”
Market pricing suggests a pause is all but certain, but traders are also bracing for the possibility of a hawkish surprise, with a 60 percent probability of a 25 basis-point hike priced in by July.
After hitting the highest since March on Tuesday, two-year Treasury yields were down 5 bps to 4.65 percent.
The benchmark 10-year yield was last down 3 basis points to 3.81 percent after hitting the highest in 2–1/2 weeks on Tuesday.
“We think it will be a hawkish pause as the Fed emphasises that the hiking cycle might not be done. Whether the pause turns into a skip will depend on incoming data,” said Eugene Leow, senior rates strategist at DBS Bank.
The U.S. dollar was down 0.1 percent against major peers, hovering near a three-week low it hit on Tuesday.
Stocks were also upbeat in parts of Asia. Tokyo’s Nikkei continued to outperform, closing at a fresh 33-year high, ahead of the Bank of Japan’s policy meeting on Friday where it is expected to maintain its ultra-loose policy.
Chinese blue chips marked the fifth straight session of gains on hopes for more economic stimulus, which could come on Thursday when China’s central bank is expected to cut rates on medium-term policy loans, following a short-term lending rate cut on Tuesday.
But the inflation outlook is causing jitters elsewhere.
In the UK, where data showing a rapid pickup in UK wage growth on Tuesday has prompted traders to raise their bets on Bank of England rate hikes, sterling touched a fresh one-month high of $1.2638, boosted by the rate hike bets.
UK government bonds calmed on Wednesday and yields were slightly lower on the day, following Tuesday’s sell-off that sent two-year yields surging 25 basis points, above levels seen during September’s “mini budget” crisis.
German two-year bond yields touched a fresh high since March.
The euro was up 0.1 percent hovering just below Tuesday’s three-week high.
Oil prices reversed earlier losses after receiving a 3 percent boost on China’s policy rate cut with Brent crude futures up 1 percent to $75.04 per barrel.
But Chinese stimulus is denting the yuan, which fell to a 6-1/2 month low following Tuesday’s rate cut and anticipation of more.
Gold prices were 0.4 percent higher at $1,950.99 per ounce.
