Stocks climb and U.S. yields fall after inflation data

(C) Reuters. FILE PHOTO: People walk past a screen displaying the Hang Seng stock index at Central district, in Hong Kong, China October 25, 2022. REUTERS/Lam Yik

By Chuck Mikolajczak

NEW YORK (Reuters) – A gauge of global stocks was poised for its biggest weekly percentage gain in two months on Friday, with the two-year U.S. Treasury yield set for its first quarterly decline in the past nine, as U.S. inflation data fueled hopes the Federal Reserve may be reaching the end of its rate hiking cycle.

U.S. consumer spending rose moderately in February, and while inflation cooled, it remained elevated enough to possibly allow the Federal Reserve to raise interest rates one more time this year.

(Graphic: Fed’s preferred inflation gauge eases – https://www.reuters.com/graphics/PCE-INFLATION/zdpxdqzbmpx/chart_eikon.jpg)

Additional data showed U.S. consumer sentiment fell for the first time in four months in February on concerns of an impending recession, although the impact of the recent banking crisis was muted.

Expectations for a 25 basis point rate hike at its May meeting dipped to about 50%, with no hike seen to be just as likely.

On the heels of the inflation data, Boston Federal Reserve President Susan Collins said it remains “early days yet” for the central bank in determining whether the Fed has hiked rates enough to lower inflation to its 2% target.

“Broadly, the market is putting aside the Fed rate headwinds that we have been dealing with for the last 15 to 18 months, they are looking past that and looking for a more supportive monetary policy environment,” said Zach Hill head of portfolio management at Horizon Investments in Charlotte, North Carolina.

“It is a little deceiving if you just look at the headline indices and think all is well, there is a lot of commotion under the surface and largely that commotion makes sense – going away from the more credit-intensive, weaker balance sheet, more speculative names in the small- and mid-cap universe and towards the biggest of the big, best capital market access, really high-quality names that de-rated materially throughout all of last year.”

On Wall Street, U.S. stocks rose, with the S&P 500 set to notch its second straight quarterly advance, thanks in part to three straight weekly advances this month. The Nasdaq Composite, up about 16% in the first quarter, was set to snap a streak of four straight quarterly declines.

On the session, The Dow Jones Industrial Average .DJI rose 245.43 points, or 0.75%, to 33,104.46; the S&P 500 .SPX gained 35.83 points, or 0.88%, to 4,086.66; and the Nasdaq Composite .IXIC added 147.76 points, or 1.23%, to 12,161.23.

European shares were also higher, after a reading of inflation in the euro zone dropped by the most on record in March, although the core price growth, which excludes food and energy, accelerated.

The pan-European STOXX 600 index .STOXX closed up 0.66% and MSCI’s gauge of stocks across the globe .MIWD00000PUS gained 0.71%.

Even with a slight decline for the month, the STOXX index notched a second straight quarterly gain. MSCI’s index was poised for a fifth straight session of gains, it’s longest streak in two months.

Expectations the Fed may be nearing the end of its rate hiking cycle have helped send U.S. Treasury yields lower recently. The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2.8 basis points at 4.071% on the day after touching a low of 4.069%.

The two-year yield is set to decline for the first time in nine quarters after a drop of nearly 70 basis points in March, the biggest monthly drop since January 2008 during the financial crisis.

Benchmark 10-year notes US10YT=RR were down 5.3 basis points to 3.498%, from 3.551% late on Thursday. The 10-year yield is down more than 40 basis points for the month.

The dollar pared some gains against the euro in the wake of the U.S inflation data, as investors see the Fed pausing its rate hiking cycle before the European Central Bank.

The dollar index =USD rose 0.264%, with the euro EUR= down 0.41% to $1.0856. The dollar index is on pace for its second straight quarterly decline.

The Japanese yen weakened 0.09% versus the greenback at 132.76 per dollar, while Sterling GBP= was last trading at $1.2336, down 0.38% on the day.

Oil prices were higher on the session, but likely to see their biggest monthly decline since November.

U.S. crude CLc1 recently rose 1.73% to $75.66 per barrel and Brent LCOc1 was at $79.79, up 0.66% on the day.