NEW YORK: Global stock markets rallied to new highs and bond yields slid on Thursday after a jump in U.S. inflation was viewed as insufficient to alter the Federal Reserve's easy monetary policy stance that rising consumer prices will be transitory.
MSCI's global benchmark, the S&P 500 and a pan-European stock index surged after the U.S. Labor Department said the consumer price index in the 12 months ended in May accelerated 5.0%, the biggest year-on-year increase since August 2008.
The report was largely in line with expectations, said Subadra Rajappa, head Of U.S. rates strategy at Societe Generale in New York.
"The market is really buying into the narrative that the rise in inflation is in fact transient because you're not seeing that necessarily being priced into fears in the bond market," Rajappa said.
The 10-year U.S. Treasury note's yield fell to a three-month low of 1.440%. When investors were worried about inflation later in March, the yield had spiked to 1.776%.
Many now believe economic growth will slow and that any acceleration in inflation will be temporary, said Joseph LaVorgna, chief economist for the Americas at Natixis in New York.
"The (equity) market is going to ignore the data. It's going to rally regardless," LaVorgna said.
"If it turns out the economy is weaker in the next three to six months than people think, it won't even matter if inflation continues to surprise to the upside," he said.
MSCI's all-country world index rose 0.37% to 718.23, setting a record close and intraday high. The pan-European STOXX 600 scaled a new peak before closing slightly higher at 454.56. The European Central Bank raised its recovery outlook and pledged to keep stimulus flowing.
On Wall Street, the Dow Jones Industrial Average rose 0.06%, the S&P 500 gained 0.47%, climbing past its previous record, and the Nasdaq Composite added 0.78%, spurred by growth stocks that thrive on low interest rates.
While wages are going up, prices for most commodities outside of energy have softened, as lumber, grains and meat have come down, said Thomas Hayes, chairman and managing member of Great Hill Capital LLC.
Inflation's "rate of change had people very alarmed, particularly in the commodities basket. The softening has people a little bit more at ease," Hayes said. "With the 10-year barely moving off this news, I'm inclined to start to put money to work."
Surprisingly strong U.S. inflation in April had rattled investors, prompting caution ahead of Thursday's May data. Yet risk assets have remained buoyant as central bankers on both sides of the Atlantic signaled willingness to keep monetary taps open until recovery takes hold.
The ECB said it would buy bonds at a "significantly higher" pace than earlier this year, reaffirming its March pledge as most central bank watchers had expected.
In the United States, data showed people filing new claims for unemployment benefits fell last week to the lowest level in nearly 15 months.
The dollar index fell 0.11% to 90.041, with the euro down 0.02% to $1.2176. The Japanese yen strengthened 0.29% versus the greenback at 109.30 per dollar.
Oil prices edged up to their highest in more than two years in volatile trade on optimism for strong economic demand after new U.S. unemployment claims fell to their lowest since the country's first wave of COVID-19 last year.
Brent futures settled up 30 cents at $72.52 a barrel by 1:24 p.m. EDT (1724 GMT), while U.S. West Texas Intermediate (WTI) crude rose 33 cents to settle at $70.29 a barrel.
U.S. gold futures settled at 1, 896.40 an ounce.Mean while, Wall Street stocks ended firmer on Thursday, with the S&P 500 hitting a record closing high, as economic data appeared to support the Federal Reserve's assertion that the current wave of heightened inflation will be temporary.
All three major U.S. stock indexes advanced, with market-leading megacap stocks putting the Nasdaq out front. But economically sensitive transports and smallcaps ended the session in negative territory.
The Labor Department's consumer price index (CPI) data came in above consensus and added fodder to the debate over whether current price spikes could morph into long-term inflation, despite the Fed's assurances to the contrary.
But a closer look showed that much of the price surge came from items such as commodities and airfares, and is therefore likely to be temporary.
"Earlier this week we had extremely boring market days as we all had our eyes on the bullseye of this CPI report," said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina. "But once people looked under the surface, the majority of the higher inflation is due to the reopening, and stocks had a relief rally."
"The market is taking it in stride as it realizes the whole economy isn't overheating," Detrick added.
A U.S. House of Representatives committee passed a $547 billion infrastructure spending bill targeting surface transportation, adopting some of President Joe Biden's proposals as part of his broader $2.3 trillion infrastructure package.
Still, industrials and transports, sectors that stand to benefit from infrastructure spending, were in negative territory.
Unofficially, the Dow Jones Industrial Average rose 12.21 points, or 0.04%, to 34, 459.35, the S&P 500 gained 19.71 points, or 0.47%, to 4, 239.26 and the Nasdaq Composite added 106.86 points, or 0.77%, to 14, 018.61.
Among the 11 major sectors of the S&P 500, healthcare enjoyed the largest percentage gains.
But the interest rate-sensitive financial sector was the biggest loser, weighed by easing U.S. Treasury yields.
GameStop Corp, the stock most closely associated with the social media-driven "meme stock" phenomenon, slid after the videogame retailer said it may sell new shares.
Other stocks that have benefited from the retail short-squeeze rally, including Clover Health Investments Corp, AMC Entertainment Holdings, Bed Bath & Beyond Inc and GEO Group, also ended the session lower.
Boeing Co gained after sources told Reuters that United Airlines was in talks to place a multi-billion-dollar order for single-aisle jets potentially split between Boeing and Europe's Airbus.
Pfizer Inc rose on news that the United States would pay the drugmaker about $3.5 billion for 500 million COVID-19 vaccine doses that it intends to donate to the 100 lowest income countries.- Reuters