Wall Street stocks gained, Treasury bonds rallied and the dollar weakened as investors banked on the Federal Reserve maintaining its pandemic-era monetary stimulus programme.
The technology-focused Nasdaq Composite rose 0.6 per cent in early dealings, while the broader-based S&P 500 added 0.5 per cent.
The yield on the 10-year US Treasury bond fell 0.04 percentage points to 1.376 per cent as the benchmark government debt instrument rose in price. The dollar index, which measures the greenback against major currencies, fell 0.4 per cent.
Fed chair Jay Powell will give his semi-annual monetary policy report to Congress on Wednesday after data showed US headline consumer prices rose 0.9 per cent between May and June, exceeding economists’ forecasts with the largest monthly gain since 2008.
In prepared remarks ahead of his Congressional appearance, Powell stressed that he expected price increases to ease later in the year. He added that the threshold for altering the central bank’s $120bn of monthly debt purchases that have boosted financial markets throughout the pandemic was “a ways off”.
Powell will expand on his assessment of monetary policy after a Bank of America survey published this week found that the share of investors who thought the economy would continue to improve dropped sharply from a peak of 91 per cent in March to 47 per cent this month.
“We are likely seeing peak growth, peak inflation, and peak stimulus in many countries right now,” said Mark McCormick, global head of currency strategy at TD Securities. “Markets are slowly absorbing this turning point, but with Delta [coronavirus] cases rising quickly, the outlook remains highly uncertain.”
Elsewhere, UK gilts dropped after data showed the country’s rate of inflation was running ahead of the Bank of England’s target, piling pressure on the central bank to reduce its own debt purchases.
The yield on the 10-year gilt rose 0.02 percentage points to 0.653 per cent. Sterling gained 0.6 per cent against the dollar to $1.388 and the blue-chip FTSE 100 dropped 0.3 per cent.
UK consumer prices rose 2.5 per cent in the 12 months to June, data on Wednesday showed, the third consecutive month of inflation running higher than economists had expected.
Derivative markets linked to the path of BoE rates on Wednesday priced in an increase in UK interest rates to 0.25 per cent by November 2022. Before the inflation data, such an increase was expected by May 2023.
BoE policymakers “will undoubtedly still insist price pressures will be shortlived”, said John Wraith, head of UK rates strategy at UBS. “But the higher the rate goes in the interim, both absolutely and relative to their own forecast, the more that conviction will be undermined.”
Europe’s Stoxx 600 share index dipped 0.1 per cent. Brent crude, the oil benchmark, was steady at $76.48 a barrel.
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