NEW YORK/LONDON, April 11 (Reuters) - A gauge of global stocks rallied and bond yields inched higher on Tuesday as traders anticipate interest rates will soon peak, even as the market bets the Federal Reserve will tighten monetary policy further in May to tame inflation.
Gold climbed back up above the key $2,000 level as the dollar came off Monday's peak, while oil prices rose despite Chinese inflation data pointing to persistently weak demand.
Investors are keenly awaiting consumer prices data on Wednesday and producer prices on Thursday. The consumer price index is expected to show core inflation rose 0.4% on a monthly basis (USCPF=ECI) and 5.6% year-over-year (USCPFY=ECI) in March.
The two-year Treasury yield, which typically moves in step with interest rate expectations, rose 3.5 basis points to 4.043%.
"The bond market continues to move higher in price and lower in yield, anticipating a Fed pause in terms of interest rate hikes and a pivot at some point," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. "We think the bond market is way ahead of itself."
Futures show a 67.2% likelihood that the Fed will raise rates by 25 basis points to a range of 5.0%-5.25% when policymakers conclude a two-day meeting on May 3, CME Group's FedWatch tool shows.
But markets are pricing the Fed to cut its target rate to 4.392% by December as the economy slow and potentially enters a recession.
"The Fed could surprise us and pause" in May, Ghriskey said. "But they're very unlikely to roll over at this point. They are determined to crush inflation."
The yield on benchmark 10-year Treasury notes rose 2.4 basis points to 3.439%, while the 10-year German bund's yield rose 13.1 basis points to 2.311%
Equity markets in Europe rallied, after a long four-day Easter holiday, while the S&P 500 traded little changed and the Nasdaq fell. Large U.S. banks on Friday kick off earnings season that is expected overall to show a decline in profits.
MSCI's gauge of stocks across the globe (.MIWD00000PUS) gained 0.35% and the pan-European STOXX 600 index (.STOXX) rose 0.56%. Japan's blue-chip Nikkei rallied more than 1% (.N225).
On Wall Street, the Dow Jones Industrial Average (.DJI) rose 0.18%, the S&P 500 (.SPX) lost 0.07% and the Nasdaq Composite (.IXIC) dropped 0.56%.
Bolstering the case for global inflation easing further this year, data showed China's consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand remained weak.
Investor morale in the euro zone meanwhile improved in April after a surprise dip in March, a survey showed.
South Korea's central bank held rates steady for a second consecutive meeting on Tuesday, while the Bank of Canada is expected to leave rates unchanged when it meets on Wednesday.
An analysis in the International Monetary Fund's latest World Economic Outlook suggested that current high rates "are likely to be temporary" and predicted that, once inflation is brought under control, rates in advanced economies would eventually return to pre-pandemic levels.
The International Monetary Fund on Tuesday trimmed its 2023 global growth outlook slightly as higher interest rates cool activity but warned a severe flare-up of financial system turmoil could slash output to near recessionary levels.
Investor sentiment has also been boosted by signs that turmoil in the banking sector is easing.
Deposits at U.S. commercial banks rose near the end of March for the first time in about a month, showing signs of stabilizing after the two largest bank failures since the financial crisis rocked the banking system and rattled depositors, Fed data last week showed.
"We're just beginning to feel the pain of these much higher interest rates. And banks may be okay for now, but the credit risk is still to impact both them and the economy," said Guy Miller, chief market strategist at Zurich Insurance Group.
The dollar fell after a strong U.S. jobs report for March showed a resilient labor market, adding to expectations of another Fed rate hike. The data on Friday showed employers added 236,000 jobs while the unemployment rate fell to 3.5%.
The dollar index fell 0.322%, with the euro up 0.49% to $1.0912 and the yen strengthening 0.09% at 133.49 per dollar.
Bitcoin touched a fresh 10-month high at $30,438 before pulling back to $30,071, after breaking free of recent ranges on Monday. The digital token had been stuck between about $26,500 and $29,400 for the previous three weeks.
In Asia, Japanese government bond yields mostly fell, after new Bank of Japan Governor Kazuo Ueda vowed on Monday to maintain the bank's ultra-loose monetary policy.
The 10-year JGB yield fell to as low as 0.445%, its lowest since April 4, after hovering at 0.465% in the previous session.
Elsewhere, U.S. crude recently rose 1.39% to $80.85 per barrel and Brent was at $84.97, up 0.94% on the day.
