Equities rise, yields fall after data shows US inflation may have peaked

World shares rose and the yield on benchmark US Treasuries weakened on Friday after data showed that US consumer spending rose in April and the uptick in inflation slowed, two signs the world’s largest economy could be on track to grow this quarter.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.9 per cent last month, and although inflation continued to increase in April, it was less than in recent months. The personal consumption expenditures (PCE) price index rose 0.2 per cent, the smallest gain November 2020.

The US Federal Reserve, in minutes from its May meeting released earlier this week, called inflation a serious concern. A majority of the central bankers backed two half-of-a-percentage point rate hikes in June and July, as the group attempts to curb inflation without causing a recession.

The Fed did leave room for a pause in hikes if the economy weakens.

Analysts said the consumer spending and inflation data was encouraging and supported growth estimates for the second quarter that are mostly above a 2.0 annualized rate.

“The growth engine of the US economy is still alive and kicking, and that’s important,” said Joe Quinlan, Head of CIO Market Strategy for Merrill and Bank of America Private Bank. “Growth estimates for (the second quarter) are still good. There is a better tone in the market than we have seen in recent weeks, in terms of inflation possibly peaking here. Maybe we can avoid stagflation.”

The MSCI world equity index, which tracks shares in 45 nations, rose 1.78 per cent at 2:50 p.m. EDT (1850 GMT).

Global equity funds saw inflows in the week to May 25 for the first week in seven, according to Refinitiv Lipper.

European shares hit a three-week high rose 1.42 per cent. Britain’s FTSE also hit a three-week high, and was heading for its best weekly showing since mid-March.

The Dow Jones Industrial Average rose 368.34 points, or 1.13 per cent, to 33,005.53, the S&P 500 gained 75.33 points, or 1.86 per cent, to 4,133.17 and the Nasdaq Composite added 319.75 points, or 2.72 per cent, to 12,060.40.

The yield on benchmark 10-year Treasury notes was last 2.7432 per cent. It had hit a three-year high of 3.2030 per cent earlier this month on fears that the Fed may have to raise rates rapidly to bring inflation under control.

Lower yields shows the Fed’s monetary policy is succeeding in tightening credit and slowing down prices, said BofA’s Quinlan.

“The 10 year yield is suggesting we don’t have to have inflation break above 9-10 per cent,” Quinlan said. “We are getting close to a peak in inflation.”

The two-year yield, which rises with traders’ expectations of higher fed fund rates, fell to 2.4839 per cent.

German 10-year bond yields fell 4 bps to 0.955 per cent.

Asian shares also benefited from hopes of stabilizing Sino-US ties and more Chinese government stimulus.

The United States would not block China from growing its economy, but wanted it to adhere to international rules, Secretary of State Antony Blinken said on Thursday in remarks that some investors interpreted as positive for bilateral ties.

Emerging market stocks rose 2.01 per cent. MSCI’s broadest index of Asia-Pacific shares outside Japan was 2.23 per cent higher, while Japan’s Nikkei rose 0.66 per cent.