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US stocks and bonds rally after lower than forecast inflation data

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US stocks and government bonds rallied on Wednesday after data showed inflation in the world’s largest economy had steadied, raising hopes that the Federal Reserve may temper its aggressive rate rises to subdue soaring prices.

The consumer price index data published on Wednesday showed that prices in the US rose 8.5 per cent year on year in July, a slower increase than in June and below economists’ forecasts of 8.7 per cent. The figures also showed that on a month-on-month basis, there was no increase in the CPI in July compared with a 1.3 per cent rise in June.

The blue-chip S&P 500 gained 1.7 per cent at the open, while the technology-heavy Nasdaq Composite rose 2.4 per cent. Those moves put the S&P on track to snap four consecutive days of losses. The index has now climbed 12 per cent since mid-June.

The Vix volatility index, which serves as a measure of expected swings in US stocks, fell below 20 for the first time since April.

“Inflation has been expected to peak over the summer for some time, so it was reassuring for markets that there are clear signs that this looks to be happening,” said Oliver Blackbourn, portfolio manager at Janus Henderson Investors.

In government bond markets, the yield on the 10-year US Treasury bond, which moves with inflation and growth expectations, dropped 0.05 percentage points to 2.74 per cent. The yield on the two-year note, which moves with interest rate expectations, shed 0.2 percentage points to 3.1 per cent.

The US dollar, a haven for investors in times of uncertainty, also fell back in reaction to the data, dropping 1.1 per cent against a basket of six currencies.

The US inflation benchmark had hit 9.1 per cent in June — the highest level in 40 years — pushing the Fed into making back-to-back interest rate increases of 0.75 percentage points over the summer.

Still, the inflation data show that prices remain well above the US central bank’s 2 per cent target.

“While peak inflation is welcome news, it’s probably not enough to allow the Fed to ease off its tightening or to put recession fears to bed,” said Mike Bell, global market strategist at JPMorgan Asset Management.

Core inflation, a measure of price growth that strips out volatile categories including energy and food, also came in below expectations, staying at the 5.9 per cent level it hit in June and well below a peak in March of 6.5 per cent.

“I think this might be a new bull market as opposed to a bear market rally. The Fed will pivot eventually, the rate of increases will have to slow,” said Patrick Spencer, vice-chair of equities at Baird.

In Europe, the Stoxx 600 gained 0.9 per cent and Germany’s Dax index gained 1 per cent after losses in the previous session.

Oil prices trimmed losses, with international benchmark Brent crude shedding 0.2 per cent to trade at $94.72, recovering from losses of 1.8 per cent earlier on Wednesday.

Indices in Asia were dragged down by declines in tech stocks, with Hong Kong’s Hang Seng index closing down 2 per cent. China’s CSI 300 benchmark of Shanghai and Shenzhen-listed stocks fell 1.1 per cent. Japan’s Topix closed down 0.2 per cent.

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