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Stocks rise as investors look past jump in Fed inflation gauge

Global government bonds remained steady and Wall Street equity futures ticked higher as US inflation data confirmed investors’ expectations that the nation’s recovery from pandemic was stoking a rapid rise in prices.

Core personal consumption expenditure — the Federal Reserve’s preferred measure of inflation that excludes volatile food and energy costs — hit 3.1 per cent in April from the same month last year, its highest reading since 1992 according to Refinitiv data. Economists surveyed by Reuters had forecast a 2.9 per cent increase.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added less than 0.01 percentage points to 1.616 per cent, following the release of the PCE data. Germany’s equivalent Bund yield was flat at minus 0.171 per cent.

Inflation is fixed income investors’ nemesis because it erodes the real returns on bonds’ income payments.

“The market was priced for a big print,” said Jorge Garayo, head of inflation strategy at Société Générale, after a separate measure of US consumer price inflation jumped to a 13-year high last month. Since then, he added, “markets have consolidated around this”.

Futures markets signalled the blue-chip S&P 500 index would gain 0.3 per cent when New York stocks began trading, while the top 100 shares on the technology-heavy Nasdaq Composite was set to add 0.2 per cent.

Federal Reserve chair Jay Powell and his rate-setting colleagues have consistently said they will view jumps in consumer prices as a transitory effect of industries reopening after last year’s coronavirus shutdowns. But they have also opened a discussion about an eventual reduction of the Fed’s $120bn a month of bond purchases that have kept borrowing costs lower and supported equity markets throughout the health crisis.

“We can’t know straight away whether the Fed is right,” Garayo said. “But more big inflation prints will make the markets move towards a tapering scenario more quickly, without waiting for the Fed.”

The dollar index, which measures the greenback against major currencies, added 0.4 per cent after the inflation reading. The euro lost 0.4 per cent to purchase $1.2145.

In Europe the region-wide Stoxx 600 index rose 0.6 per cent, adding to the record high hit a day earlier.

“European equities typically outperform when bond yields rise, as they have comparatively high exposure to groups and sectors that are beneficiaries of rising yields, such as banks, industrials, consumer discretionary, and materials,” said Frédérique Carrier, RBC wealth management’s head of investment strategy.

“They have relatively lower exposure to technology and communication services, sectors that tend to underperform in that environment.”

Brent crude, the global oil benchmark, was 0.3 per cent higher at $69.65 a barrel.

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