Stocks up, Treasury yields down on cooler inflation, US-China ‘deal’

Audio By Carbonatix

Enlarge

By Lawrence Delevingne and Lawrence White

(Reuters) -Wall Street stocks gained and the dollar and U.S. Treasury yields dipped on Wednesday after President Donald Trump said a U.S.-China trade deal was “done” and a fresh report on U.S. consumer prices in May showed only a marginal increase.

A White House official said the agreement with China allows the U.S. to charge a 55% tariff on imported Chinese goods, including a 10% baseline “reciprocal” tariff, a 20% tariff for fentanyl trafficking and a 25% tariff reflecting pre-existing tariffs. China would charge a 10% tariff on U.S. imports, the official said. Trump also said that Beijing would supply magnets and rare earth minerals while the U.S. will allow Chinese students in its colleges and universities.

Separately, the Consumer Price Index (CPI) increased 0.1% in May amid cheaper gasoline after rising 0.2% in April, the U.S. Labor Department said on Wednesday, but inflation is expected to accelerate in the coming months on the back of the Trump administration’s import tariffs.

Chris Zaccarelli, chief investment officer for Northlight Asset Management in Charlotte, said the likely U.S. China trade deal and consumer price data should support markets.

“The narrative around tariff-induced inflation should subside,” he wrote in an email. “We are still cautious, but many of the risks that were present in early April appear to be receding.”

The Dow Jones Industrial Average gained 0.46%, the S&P 500 advanced 0.17%, and the Nasdaq Composite rose 0.12%.

Tesla shares added about 1% after Elon Musk also said he regretted some of the posts he made last week about Trump, opening the way to a healing of an abrupt rift that has roiled Washington and hurt shares in the electric carmaker.

Asian shares were slightly more positive, with MSCI’s broadest index of Asia-Pacific shares outside Japan up about 0.7%, while the STOXX benchmark for major European shares closed 0.3% lower.

The latest trade truce between China and the U.S. offered investors hope that the two superpowers can reach a lasting resolution and prevent further market disruption, but the absence of detailed terms leaves room for potential future tariff conflicts.

TREASURY YIELDS FALL

The U.S. dollar slid against most major currencies, with the dollar index down about 0.4% to 98.59. The dollar weakened slightly against the Japanese yen to trade at 144.55, while the euro edged up 0.6% to $1.149, 

Ten-year Treasury yields fell 6.2 basis points to 4.12% as the U.S. Treasury Department saw strong interest in a $39 billion sale of 10-year notes on Wednesday, indicating that demand for the debt remains strong despite concerns that foreign investors are moving away from the market.

Concerns about huge U.S. budget deficits and debt have combined with unease over the White House’s shifting policies to make investors demand a higher term premium for holding Treasuries.

Traders of short-term interest-rate futures now price in a 70% chance of a quarter-point reduction in the Fed policy rate by September, compared with 57% earlier. Policymakers are widely expected to keep rates unchanged next week..

“Another month goes by with little evidence of tariffs, but the longer-term inflation challenge they pose remains,” Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, wrote in an email. “Given the Fed likely shares that outlook, no one should be looking for rate cuts in the near future.”

In commodity markets, gold gained 0.13% to $3,326 an ounce. [GOL/]

Oil prices rose to a seven-week high as markets assessed the outcome of the U.S.-China trade talks. [O/R]

U.S. crude gained 2.49% to $66.60 a barrel and Brent rose to $68.30 per barrel, up 2.14% on the day.

(Reporting by Lawrence Delevingne in Boston, Lawrence White in London and Wayne Cole in Sydney. Editing by Tomasz Janowski, Mark Potter, Nick Zieminski and Deepa Babington)