Wall Street stocks and government bonds shrug off leap in inflation

Stocks on Wall Street hit a high and core government debt was steady as investors brushed aside the biggest jump in US inflation since the financial crisis.

The yield on the 10-year Treasury ticked lower to 1.47 per cent after the labour department reported that headline consumer price inflation accelerated 5 per cent in the 12 months to May — the largest year-on-year leap since 2008 and above the 4.7 per cent pace expected by economists polled by Bloomberg.

Equity investors took the news in their stride, helping send the blue-chip S&P 500 index to a record during morning trading, before settling 0.5 per cent higher after lunchtime in New York. The tech-heavy Nasdaq Composite climbed 0.7 per cent.

The Cboe’s Vix index, Wall Street’s so-called fear gauge that tracks expected volatility on the S&P 500, slid to 16.3 points, far below the intraday mark of 85 hit during the height of the coronavirus crisis in March 2020 and beneath its long-run average of about 20.

“Markets finally seem comfortable with the idea that inflation in the US will be transitory,” said Mimi Rushton, co-head of global FX sales at Barclays.

Still, the latest inflation reading “has to be getting the Fed’s attention”, said Cliff Hodge, chief investment officer for Cornerstone Wealth.

“It will still likely be chalked up to transitory base effects, but the CPI print alongside recent releases on higher wages will only turn up the volume on taper talk,” Hodge added.

The US central bank has maintained for months that surges in consumer prices are a temporary effect of industries reopening after pandemic lockdowns. Most of the Federal Reserve’s policymakers expect rates will remain near zero far into 2023.

The dollar, which can strengthen when expectations of higher US interest rates become widespread, barely moved. The US dollar index, which measures the currency against a basket of leading rivals, dipped 0.1 per cent. The euro traded flat against the dollar, purchasing $1.217.

Helping lift market sentiment further was news that US jobless claims had fallen to a pandemic low, dropping to 376,000 last week, slightly missing economists’ expectations for 370,000 new claims.

European government bonds were also steady after the European Central Bank raised its growth forecasts for the eurozone but pledged to maintain the pace of its pandemic-era government debt purchases at it its latest monthly meeting.

Germany’s 10-year Bund yield edged 0.01 percentage point lower at minus 0.26 per cent while France’s 10-year yield was unchanged at 0.11 per cent.

Elsewhere on the continent, the region-wide Stoxx Europe 600 index closed flat, clinging on to the high hit a day earlier, while London’s FTSE 100 gained 0.1 per cent.

Brent crude, the international oil benchmark, settled 0.4 per cent higher at $72.52 a barrel.