Shares rise, yields off slightly after U.S. inflation data

By Sinéad Carew and Danilo Masoni

NEW YORK/MILAN (Reuters) - The S&P 500 and the Dow were gaining ground on Wednesday and the dollar index declined after data showed U.S. inflation slowed on a year-on-year basis last month, giving investors some hope that price surges are peaking.

U.S. stock futures initially lost ground after core inflation, excluding items such as oil prices was higher than expected. But ultimately investors appeared encouraged by the annual consumer price growth change to 8.3% in April from 8.5% in March even though it was above the 8.1% analyst estimate.

Similarly while bond yields climbed immediately after the report in what Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis called an emotional first reaction, they lost some ground as investors digested the news.

"At the end of the day we can get all excited about whether it's a little higher or a little lower but clearly the year-on- year inflation rate rolled over and looks like it peaked in March. It seems to have turned the corner," he said.

"The other good thing here is that bond yields had a knee jerk reaction but calmed down. Whatever you think about the inflation report today it appears that bond yields were already high enough and stocks were already low enough. That tells you they had both priced in for hot inflation."

The Dow Jones Industrial Average rose 213.25 points, or 0.66%, to 32,373.99, the S&P 500 gained 18.18 points, or 0.45%, to 4,019.23 and the Nasdaq Composite dropped 61.52 points, or 0.52%, to 11,676.15.

Nasdaq fell as interest rate sensitive growth sectors, technology and consumer discretionary, reacted negatively to the inflation data. Paolo Zanghieri, senior economist at Generali (BIT:GASI) Investments, said it confirmed that inflation's return to more tolerable levels would take time.

"Overall today's data add to the case of the strong front-loading called for by (Fed Chair Jerome) Powell in the last meeting, who also suggested the possibility of two more 50bps rise in June and July," Zanghieri said.

"However, this will keep concern on the possibility of a recession high, and ultimately weakening growth may lead the Fed to temper it tightening after the summer."

The pan-European STOXX 600 index rose 1.54% and MSCI's gauge of stocks across the globe gained 0.61%. On Tuesday, the global index had fallen to its lowest level since December 2020 on fears Fed tightening could significantly slow down the global economy.

While the dollar index gained ground initially after the inflation news it was last down 0.25%, with the euro up 0.19% to $1.0547. The Japanese yen strengthened 0.17% versus the greenback at 130.22 per dollar, while Sterling was last trading at $1.2329, up 0.06% on the day.

After falling to their lowest levels in almost a week earlier on Wednesday, benchmark 10-year Treasury yields initial reaction to the inflation data was to march back towards the three-year high of 3.203% hit on Monday.

Yields since lost some ground with Benchmark 10-year notes last up 5/32 in price to yield 2.9754% compared with 2.993% late on Tuesday. The 30-year bond last rose 21/32 in price to yield 3.0905%, from 3.129%.

But the 2-year note last fell 5/32 in price to yield 2.6967%, from 2.623%.

The Fed last week raised interest rates by 50 basis points and Chair Jerome Powell said two more such hikes were likely at the upcoming policy meetings. There has also been speculation in markets the U.S. central bank will need to move by 75 basis points at one meeting.

Morgan Stanley (NYSE:MS) forecasts 2022 global economic growth to be less than half of last year's at 2.9%, down from a previous estimate of 3.2%. The U.S. bank also cut its year-end target for the S&P 500 by 11% to 3,900 points, while raising its U.S. 10-year yield forecast by 55 bps to 3.15%.

Oil prices jumped on Wednesday after plunging nearly 10% in the last two sessions, buoyed by supply concerns as flows of Russian gas to Europe fell and the European Union worked on gaining support for a Russian oil embargo. [O/R]

U.S. crude recently rose 4.92% to $104.67 per barrel and Brent was at $106.91, up 4.34% on the day.

Spot gold added 0.7% to $1,851.30 an ounce.