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.
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.
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(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)
