GLOBAL MARKETS-Stocks, gold bounce after cooler US inflation; Fed imminent

BY Reuters | ECONOMIC | 06/12/24 09:07 AM EDT

(Updates throughout)

By Amanda Cooper

LONDON, June 12 (Reuters) - Global shares rallied, while the dollar sank and gold surged on Wednesday, after data showed U.S. consumer inflation was a lot milder than expected in May, increasing the chances of a markets-friendly interest rate cut as soon as September.

The Bureau of Labor Statistics said U.S. consumer prices were unchanged in May, thanks to a drop in the cost of gasoline. This followed a 0.3% increase in April.

Economists polled by Reuters had expected a rise of 0.1%.

The dollar index, which measures the performance of the U.S. currency against six others, fell 0.7%, heading for its largest one-day drop in around a month.

U.S. stock futures rose between 0.8-1% after the numbers, from having shown a gain of just 0.1% earlier in the day. European shares bounced, pushing the STOXX 600 up by more than 1%.

Even though prices did not change on a monthly basis, inflation likely remains too high for the Federal Reserve to start cutting interest rates before September against the backdrop of a persistently strong jobs market.

The Fed wraps up a policy meeting later in the day. Wednesday's inflation figures may have offered investors some encouragement that rates are about to drop.

But in light of last week's forecast-beating employment numbers, analysts said Fed Chair Jerome Powell may need more evidence to be convinced inflation is evaporating.

"While September may be on the table, today would have had to be the first of a handful of inflation data prints that went right, which it did," Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management, said.

"It does remain challenging, however, for inflation to cool with the backdrop of the summer's heat. Let's see what the Fed forecasts this afternoon. This is good news, but we will need more of it," Rosner said.

U.S. Treasury prices leapt, pushing yields down, as investors piled into fixed income. The yield on the two-year note, the most sensitive to shifts in expectations for monetary policy, fell by as much as 15 basis points to a low of 4.687%. Ten-year notes were last yielding 4.291%, showing a drop of 11 bps on the day.

Next up is the Fed rate decision. The central bank is not expected to make any change to interest rates at its policy meeting. Instead, the focus will be on whether it keeps three rate cuts in its "dot plot" projections for this year.

After the consumer inflation figures, rate futures implied a 70% chance of a quarter-point rate cut at the Fed's September meeting, compared with around 60% earlier on..

"The (inflation) data does lessen the chances of a hawkish shift in Chair Powell's rhetoric at the post meeting press conference, even if the dot plot is likely to show a median expectation of 50bp, from 75bp, of cuts this year," Pepperstone market analyst Michael Brown said.

With the dollar under pressure and yields falling, gold , which had been trading in negative territory before the CPI data, was up 0.6% at $2,328 an ounce, while crude oil extended gains, rising 1.2% on the day to $82.80 a barrel.

(Additional reporting by Davide Barbuscia and Saqib Ahmed in New York and Stella Qiu in Sydney; Editing by Toby Chopra, Kirsten Donovan)

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