San Francisco Frontiers - Stock markets set records, dollar slides as US inflation cools

Investors had been eagerly awaiting the release of the latest consumer price index after an uptick in inflation earlier this year fuelled concerns about when the Fed might loosen its monetary policy.

Inflation came in at 3.4 percent in April on an annual basis, down from 3.5 percent in March, in line with analyst forecasts. It remains, however, well above the Fed's two-percent target.

Wall Street's three main indices pushed higher following the latest inflation figures, with the broad-based S&P 500 and the tech-heavy Nasdaq Composite striking record highs.

The dollar fell against other major currencies, as the prospect of lower rates made the greenback less attractive to foreign investors, and yields on government debt on the secondary market fell.

"This is a positive (CPI) release and should give some more comfort that the next move in rates will be a cut," said Richard Flax, chief investment officer at Moneyfarm.

"But it is still far from the Fed's target of two percent, so we wouldn't expect a swift reaction from the Fed," he said.

The recent rise in inflation has prompted analysts to change their forecast for rate cuts this year from six to as few as one or two.

"The not-too-hot (inflation) report should boost investor confidence that we could see more than one rate cut from the Fed this year, which should be a positive for equities," said Bret Kenwell, US investment analyst at eToro.

Kathleen Brooks, research director at XTB, said the market "is now pricing in two full rate cuts from the Fed this year, which was not the case on Tuesday."

While many analysts foresee the first cut in September, Brooks said the US election could prompt the Fed to act as early as July to avoid being seen as favouring President Joe Biden in the race against Donald Trump.

"If the Fed was to cut rates in September, the Fed's last meeting before the (November) US presidential election, then this could be considered pro-President Biden, as a cut in interest rates could be seen as a sweetener for voters," she said.

"Thus, if the Fed wants to cut rates in the coming months then July could be one way to avoid political scrutiny."

Fed chairman Jerome Powell warned Tuesday that the battle against prices was proving tougher than expected and indicated rates could remain elevated for some time, though he did not expect more hikes.

Given the inflation data "combined with Powell's reiteration yesterday that the bar to rate hikes remains very high, it looks like stocks have a clear path to make another run at record highs," said IG analyst Chris Beauchamp.

Analysts were also digesting data showing retail sales were flat in April, missing estimates of a 0.4 percent increase.

Europe's main stock markets also got a boost. London and Frankfurt set intraday and closing records, while Paris set a closing record.

The British capital was further boosted by optimism over credit-rating group Experian and mobile phone giant Vodafone, eclipsing news of slumping profits at luxury fashion firm Burberry.

- Key figures around 1530 GMT -

New York - Dow: UP 0.7 percent at 39,838.47 points

New York - S&P 500: UP 0.9 percent at 5,292.41

New York - Nasdaq: UP 1.0 percent at 16,672.19

London - FTSE 100: UP 0.2 percent at 8,445.80 (close)

Paris - CAC 40: UP 0.2 percent at 8,239.99 (close)

Frankfurt - DAX: UP 0.8 percent at 18,869.36 (close)

EURO STOXX 50: UP 0.4 percent at 5,100.90 (close)

Tokyo - Nikkei 225: UP 0.1 percent at 38,385.73 (close)

Shanghai - Composite: DOWN 0.8 percent at 3,119.90 (close)

Hong Kong - Hang Seng Index: Closed for a holiday

Euro/dollar: UP at $1.0872 from $1.0819 on Tuesday

Dollar/yen: DOWN at 154.81 yen from 156.40 yen

Pound/dollar: UP at $1.2669 from $1.2590

Euro/pound: DOWN at 85.82 from 85.92 pence

Brent North Sea Crude: UP 0.2 percent at $82.50 per barrel

West Texas Intermediate: UP 0.2 percent at $78.18 per barrel

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O.Anderson--SFF