World stocks pine for Fed pause, dollar stalls

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NEW YORK/LONDON – A gauge of global stocks rose and bond yields rose on Tuesday as traders anticipate interest rates will peak soon, even as the market bets the Federal Reserve will tighten monetary policy further in May to tame inflation.

Gold rose again above the key $2,000 level as the dollar exited Monday’s peak, while oil prices rose despite Chinese inflation data pointing to continued weak demand.

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Investors are closely awaiting consumer prices data on Wednesday and producer prices on Thursday. The CPI is expected to show core inflation rising by 0.4% m/m and 5.6% m/y in March.

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The two-year Treasury yield, which typically moves in line with interest rate expectations, rose 3.5 basis points to 4.043%.

“The bond market continues to move higher in price and lower in yield, anticipating a pause by the Fed in terms of rate hikes and a pivot at some point,” said Tim Gresky, chief investment strategist at Inverness Counsell in New York. “We think the bond market is way ahead of itself.”

Futures show a 67.2% chance that the Fed will raise interest rates by 25 basis points to a range of 5.0%-5.25% when policymakers wrap up a two-day meeting on May 3, CME Group’s FedWatch tool shows.

But markets are pushing the Fed to lower its target rate to 4.392% by December as the economy slows and is likely to enter a recession.

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“The Fed can take us by surprise and pause” in May, Gresky said. “But it is unlikely to roll over at this point. They are determined to crush inflation.”

The yield on the benchmark 10-year Treasury rose 2.4 basis points to 3.439%, while the yield on the German 10-year Treasury rose 13.1 basis points to 2.311%.

Stock markets in Europe rebounded, after the four-day Easter holiday, while the S&P 500 traded little changed and the Nasdaq fell. On Friday, major US banks start earnings season which is generally expected to show declining profits.

MSCI’s worldwide stock index rose 0.35% and the pan-European STOXX 600 index rose 0.56%. Japan’s Nikkei rose more than 1%.

On Wall Street, the Dow Jones Industrial Average gained 0.18%, the S&P 500 lost 0.07%, and the Nasdaq Composite fell 0.56%.

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Underlining the case for global inflation further this year, data showed that consumer inflation in China reached an 18-month low and declines in factory prices accelerated in March as demand remained subdued.

Meanwhile, investor sentiment in the eurozone improved in April, a survey showed, after a surprising drop in March.

South Korea’s central bank kept interest rates steady for the second consecutive meeting on Tuesday, while the Bank of Canada is expected to leave interest rates unchanged when it meets on Wednesday.

An analysis in the International Monetary Fund’s latest World Economic Outlook suggested that the current high rates are “likely temporary” and predicted that once inflation is brought under control, rates in advanced economies will eventually return to pre-pandemic levels.

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The International Monetary Fund on Tuesday trimmed its global growth forecast for 2023 slightly as higher interest rates cooled activity, but warned that a sharp escalation in financial system turmoil could reduce output to near-stagnation levels.

Investor sentiment was also boosted by signs that turmoil in the banking sector is abating.

Federal Reserve data last week showed that deposits in US commercial banks rose near the end of March for the first time in about a month, showing signs of stabilization after the biggest bank failures since the financial crisis that rocked the banking system and worried depositors.

We are just beginning to feel the pain of these higher interest rates. “Banks may be fine for now, but credit risk is still affecting them and the economy,” said Guy Miller, chief market strategist at Zurich Insurance Group.

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The dollar fell after the strong US jobs report for March showed resilience in the labor market, adding to expectations of another Fed rate hike. Friday’s data showed that employers added 236,000 jobs while the unemployment rate fell to 3.5%.

The dollar index fell 0.322%, with the euro rising 0.49% to $1.0912 and the yen rising 0.09% to 133.49 per dollar.

Bitcoin touched a 10-month high of $30,438 before retreating to $30,071, after breaking out of recent ranges on Monday. The digital coin has been stuck between around $26,500 and $29,400 for the previous three weeks.

In Asia, Japanese government bond yields mostly fell, after New Bank of Japan Governor Kazuo Ueda pledged on Monday to maintain the bank’s ultra-loose monetary policy.

The 10-year government bond yield fell to 0.445%, its lowest since April 4, after hovering at 0.465% in the previous session.

Elsewhere, US crude oil recently rose 1.39% to $80.85 a barrel, and Brent crude hit $84.97, up 0.94% on the day.

(Reporting by Dara Ranasinghe; Additional reporting by Selina Lee in Hong Kong and Junko Fujita in Tokyo; Editing by Simon Cameron-Moore, Mark Heinrichs and Alexander Smith)