By Koh Jui Ching and Lawrence White
NEW YORK/LONDON (Reuters) – Stocks jumped and bond yields fell on Tuesday after data showed U.S. producer prices rose less than expected in July, reinforcing market expectations that slowing inflation will allow the Federal Reserve to cut interest rates soon.
The U.S. Labor Department’s Bureau of Labor Statistics said on Tuesday that the producer price index for final demand rose 0.1 percent last month after advancing 0.2 percent in June. Economists polled by Reuters had forecast the producer price index rising 0.2 percent.
“The muted 0.1% month-over-month increase in the final PPI and the unchanged core PPI for July are not as good as they sound, but they are nonetheless consistent with the Fed’s preferred core PCE price measure of increasing at an annual pace of less than 2%,” said Paul Ashworth, chief North America economist at Capital Economics.
Hopes of a rate cut boosted Wall Street’s gains. U.S. stocks rose 0.8%, the S&P 500 gained 0.5% and the MSCI World Index rose 0.9%.
In line with speculation of monetary easing, Treasury yields fell. The benchmark index fell to 3.8712%, while the yield on two-year Treasuries fell to 3.9606%.
European stocks rose 0.2%, while the index jumped more than 3% after Monday’s holiday, a welcome relief after last week’s wild swings that began with a huge sell-off triggered by a stronger yen and fears of a U.S. recession.
“While aftershocks may reveal vulnerabilities, we continue to view recent volatility as the equivalent of a ‘heart palpitation’ rather than a ‘cardiac arrest,’” Victor Shvets, head of global desk strategy at Macquarie Capital, said in a note.
“We also believe that the tensions caused by the slowdown in the US economy are overblown.”
The yen was steady at 147.2 yen per dollar, after touching a seven-month high of 141.675 on Monday, still far from a 38-year low of 161.96 hit in early July.
The Bank of Japan’s interest rate hike last month following bouts of intervention by Tokyo earlier in July has rattled investors and prompted them to pull out of popular carry trades, which use low-interest market currency to fund higher-yielding investments.
The latest weekly data through Aug. 6 showed that leveraged funds — typically hedge funds and various types of money managers — closed their yen positions at the fastest rate since March 2011.
Given the recent appreciation of the yen, the dollar versus the yen is now more in line with the yield differential, according to Carsten Junius, chief economist at J. Safra Sarasin.
“Another wave of yen-funded carry trade decline is likely to push the yen slightly higher towards the end of the year. However, we do not expect USD/JPY to fall significantly below 140,” he said.
A week full of data
Data released this week could bolster views on the Fed’s next move. Markets are currently evenly split between a 25 basis point rate cut or a 50 basis point cut at the next meeting in September.
Traders expect a 100 basis point rate cut this year.
Surprisingly weak payrolls data was the trigger for the market crash at the start of last week, but strong US data since then has eased slowdown fears.
Any hint of mild inflationary pressures could prompt financial markets to double down on bets that the Federal Reserve will cut interest rates sharply this year, which would weigh on the dollar, said Christina Clifton, senior economist at the Commonwealth Bank of Australia.
US consumer price index data for July is due on Wednesday, and is expected to show the inflation rate rising on a monthly basis to 0.2%. Retail sales data is due on Thursday.
Euro zone bond yields were little changed. The yield on the 10-year German Bund, the euro zone benchmark, fell to 2.188%. It hit its lowest since January at 2.074% last week.
The US dollar index, which measures the greenback’s value against six other currencies, fell 0.18% to 102.9. The euro rose 0.3% to $1.0960, while the British pound rose 0.4% to $1.28205.
In commodities, futures fell 1% to $81.43 a barrel, while U.S. West Texas Intermediate crude futures fell 1% to $79.24 a barrel. Brent crude rose more than 3% on Monday, while futures rose more than 4%.