GLOBAL MARKETS-Stocks embrace cooling U.S. inflation data, dollar falls

(Adds comment, new prices) By Herbert Lash and Dhara Ranasinghe NEW YORK/LONDON April 12 (Reuters) - Government bonds and a gauge of global stocks rallied on Wednesday after data showed cooler-than-expected headline inflation in March, suggesting the Federal Reserve may pause monetary tightening following one more rate hike in May. U.S. consumer prices barely rose last month as the cost of gasoline declined 4.6%, but stubbornly high rents kept underlying inflation simmering, likely ensuring that the Fed will raise interest rates after policymakers meet on May 2-3. Gold prices rose and the dollar fell after the Consumer Price Index (CPI) climbed 0.1% last month, or half the rate of market expectations, after advancing 0.4% in February. But inflation is still running well above the Fed's 2% target. "Today's inflation data is confirmation that inflation trends are moving forward. But from the market's perspective, it might be getting ahead of itself because I don't think the Fed will be cutting rates this year," said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan. "At some point, investors are going to have to grapple with the idea that rates are going to stay higher for longer this year, and that could create some tension for stocks down the road," he said. Money markets trimmed expectations for a May Fed rate hike, pricing in a 65.2% chance of a 25-basis-point move, versus 72.9% on Tuesday, CME Group's FedWatch Tool showed. But markets are pricing the Fed to cut its target rate to 4.365% by December, slightly less than the day before, as the economy slows and potentially enters a recession. With core CPI, which excludes volatile food and energy components, rising 5.6% after a 5.5% rise in February, markets were still leaning towards further tightening.

The inflation data came on the heels of last Friday's employment report, which showed a solid pace of job growth in March and the unemployment rate falling back to 3.5%. The strong labor market easily could pressure prices and give the Fed reason to "keep at it" as it works to bring down inflation. Markets also saw a brighter outlook in Canada after the Bank of Canada left its key overnight interest rate on hold at 4.50% as expected and raised its growth forecast for 2023, while dropping language warning of a potential recession. The Canadian dollar strengthened against the greenback. But Austria's central bank chief told a German newspaper that the European Central Bank needs to keep raising interest rates and that the inflation outlook alone would warrant another 50 basis point increase in May,

MSCI's gauge of stocks across the globe gained 0.53%, while the pan-European STOXX 600 index rose 0.28%. On Wall Street, the Dow Jones Industrial Average rose 0.51% and the S&P 500 gained 0.41%. But the Nasdaq Composite added 0.18% on fears of higher rates ahead. In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan was 0.16% lower in choppy trading, snapping a three-day winning streak.

BONDS UP, DOLLAR DOWN

U.S. bond yields fell after the CPI numbers. Rate-sensitive two-year Treasury yields fell 7.1 basis points to 3.987% and the 10-year slid 2.5 basis points to 3.409%.

The dollar fell with an index measuring the U.S. currency against six rivals down 0.627%. The euro rose 0.77% to $1.0994 and the yen strengthened 0.47% versus the greenback at 133.04 per dollar.

Minutes of the Fed's March meeting are due for release at 2 p.m. (1800 GMT). Investors will parse the minutes for clues on the monetary path of the U.S. central bank, as well as the impact of the stress in the banking sector. The International Monetary Fund warned on Tuesday that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year as it lowered its 2023 global growth forecasts. While markets expect rates moving lower, the cut in oil production announced by the OPEC+ group last week has also fanned fears of inflation flaring. Geopolitics was also in focus after China said on Wednesday that President Tsai Ing-wen was pushing Taiwan into "stormy seas" after Beijing held military exercises in response to Tsai's recent meeting with U.S. House Speaker Kevin McCarthy in California. China shares were mixed, with the Shanghai Composite Index up 0.4% while Hong Kong's Hang Seng Index slipped 0.9% as investors weighed rising geopolitical tensions.

Elsewhere, U.S. crude recently rose 1.68% to $82.90 per barrel and Brent was at $87.07, up 1.71% on the day. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates YTD Global asset performance Asian stock markets ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Herbert Lash, additional reporting by Ankur Banerjee, Yoruk Bahceli, Dhara Ranasinghe; Editing by Raissa Kasolowsky and Angus MacSwan)

Messaging: herb.lash.reuters.com@reuters.net))

Reuters

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GLOBAL MARKETS-Stocks embrace cooling U.S. inflation data, dollar falls

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