Stocks gain, gold jumps as Fed rate hike pause seen

By Herbert Lash and Amanda Cooper

NEW YORK/LONDON (Reuters) – A gauge of global stocks rallied and bond yields were steady on Thursday after moderating U.S. producer prices and a jump in weekly jobless claims bolstered bets that the Federal Reserve may soon pause its hiking of interest rates to tame high inflation.

Gold hit a 13-month high about $30 shy of a record peak and the dollar weakened after the data reduced expectations that the Fed will raise rates in May, a major market concern as monetary policy that is too tight can provoke a U.S. recession.

The U.S. Labor Department’s producer price index for final demand dropped 0.5% in March, the most since April 2020, after being unchanged in February. The data came a day after data showed consumer prices cooling a bit more than expected.

While the number of Americans filing new claims for unemployment benefits rose to a three-month high last week, the labor market remains strong, posing a source for higher prices.

“We are having again a resumption of a trend where inflation is moderating and that clearly is seen in a supportive light by the market,” said Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management in New York.

“Now our expectation is this trend will continue, especially after the summer,” Skiba said.

Futures priced in a 71.1% chance the Fed raises its lending rate by 25 basis points when policymakers conclude a two-day meeting on May 3, up from 61% soon after the data was released, CME Group’s FedWatch Tool showed.

US inflation, Fed rates and markets https://fingfx.thomsonreuters.com/gfx/mkt/zgpobjnzyvd/Pasted%20image%201681292009856.png

U.S. stocks ended sharply higher on optimism the Fed could be nearing the end of its aggressive rate hiking cycle. The Dow Jones Industrial Average rose 1.14%, the S&P 500 gained 1.33% and the Nasdaq Composite added 1.99%.

Bonds initially rallied but later retreated a touch. The yield on two-year Treasuries, which reflect the outlook on interest rates, rose 0.5 basis point to 3.977% and 3.3 basis points to 3.454% on 10-year notes. Yields move opposite their price.

“The way we’ve been trading over the last sessions indicates that the market is more positively positioned with regards to their exposure to Treasuries,” Skiba said. “That’s why we do not have those dramatic moves in U.S. Treasuries on the back of better-than-expected inflation data.”

MSCI’s gauge of stocks across the globe gained 1.11%. In Europe, the pan STOXX 600 index closed up 0.40% and the euro rose to a 12-month high at $1.1068.

Investors are positive on Europe, with blue-chip stocks hitting a two-decade peak on Wednesday. They reckon Europe’s central bankers will need to be more hawkish for longer than their U.S. counterparts to rein in rising prices.

The dollar index fell 0.5% to its lowest level in more than two months, while the yen strengthened 0.29% to 132.74 per dollar.

The focus now turns to Friday when earnings season for Wall Street begins in earnest, with Citigroup Inc, Wells Fargo and JPMorgan Chase & Co due to report.

With investors placing a greater chance of the European Central Bank raising rates for longer, the gap between 10-year Treasury and Bund yields reached its narrowest in two years, reflecting the steeper rise in German yields.

The Aussie dollar rose 1.0% on the back of surprise surges in both Chinese exports, which rose 14.8% compared with last March, and domestic Australian jobs.

Oil prices edged lower after scaling multi-month high levels in the previous session, weighed by fears of a looming U.S. recession and warnings from the Organization of the Petroleum Exporting Countries about hits to summer oil demand.

U.S. crude fell $1.10 to settle at $82.16 a barrel, while Brent settled down $1.24 at $86.09.

Gold rose as a weaker dollar and declining rates mean non-interest bearing bullion can compete more effectively for investor money, especially if inflation persists, given its reputation as a hedge against rising price pressures.

U.S. gold futures settled 1.5% higher at $2,055.30 an ounce.

(Reporting by Herbert Lash in New York; Additional reporting by Amanda Cooper in London, Tom Westbrook and Ankur Banerjee in Singapore; Editing by Angus MacSwan and Matthew Lewis)