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Stocks jump after U.S. CPI soothes rate hike worries

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By Samuel Indyk

LONDON (Reuters) – Global shares rose and the U.S. dollar dropped on Tuesday, after pivotal U.S. inflation data showed consumer prices rose at a slower-than-expected pace in May, providing the Federal Reserve with ammunition to pause its tightening cycle on Wednesday.

MSCI’s gauge of stocks across the globe was last up 0.4%, after the Bureau of Labor Statistics’ consumer price index (CPI) rose 4% in May, down from 4.9% in April and below expectations in a Reuters poll of 4.1%.

Market expectations for the Fed to keep its interest rate on hold at the conclusion of its two-day policy meeting tomorrow jumped to around 95% from around 75% before the data.

That sent Wall Street futures higher, having been little changed before the data release.

On Monday, the S&P 500 and the Nasdaq rallied to their highest closing levels since April 2022.

Stocks are moving upwards because the data means “the Fed will likely stay pat on rates, skip this month, and leave the door open for rate hikes in July,” said Peter Cardillo, chief market analyst at Spartan Capital Securities.

“Good news overall but still data dependent,” Cardillo added.

The S&P 500 has rallied more than 20% from its October 2022 low as gains in market heavyweights Amazon, Apple and Tesla have propelled the market upwards.

So far this year, the S&P has gained 13%, but its equal-weight equivalent, which dilutes the impact of the largest companies in the index, has risen just 3%.

Core CPI rose 0.4% on a monthly basis, pushing the annual rate to 5.3%, in line with expectations but down from 5.5% the previous month.

The dollar index hit its lowest level since May 22 after the data and the 10-year U.S. Treasury yield dropped 7 basis points to as low as 3.682%, its lowest level in almost a week.

In commodities, Brent crude futures, which are 40% below where they were this time last year, were last up 2.4% at $73.57 a barrel, while U.S. crude futures rose 2.3% to $68.63. Gold rose 0.2% to $1,961 an ounce.

A VERY BRITISH PROBLEM

Meanwhile, data on Tuesday that showed a rapid pick-up in UK wage growth in the three months to April could complicate matters for the Bank of England, which is already grappling with inflation that is more than four times its target of 2%.

“The key takeaway here is, not only was unemployment not ticking higher, we’ve got strong jobs growth and also wage growth is just extremely high right now and that’s going to be making the Bank of England feel very uncomfortable,” City Index senior markets analyst Fiona Cincotta said.

Money markets show traders now anticipate a peak in UK rates at around 5.7% by December, up from a terminal rate of 4.85% by November a month ago.

The European Central Bank, meanwhile, is expected to raise rates by 25 basis points on Thursday and signal it has more room to tighten policy, while the Bank of Japan is expected to maintain its ultra-loose policy after it meets on Friday.

(Additional reporting by Amanda Cooper and Farouq Suleiman in London and by Julie Zhu in Hong Kong; Editing by Conor Humphries and Alex Richardson)

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