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Yields on US Treasury bonds hit their highest levels in more than three months on Thursday after surprisingly strong data boosted expectations that the Federal Reserve will need to raise interest rates further to tame inflation.
A final revision to US first-quarter gross domestic product showed the economy growing at an annualised pace of 2 per cent in the first three months of the year, well above the 1.3 per cent rate previously reported.
Yields on 10-year bonds jumped 0.14 percentage points to 3.85 per cent while those on interest rate-sensitive two-year notes added 0.15 percentage points to 4.87 per cent.
José Torres, senior economist at Interactive Brokers, described the GDP report as a “scorcher”.
“The strong 2 per cent number gives the Fed more leeway for increasing the fed funds rate without pushing the economy into a recession,” he added.
Futures trading implies investors are factoring in an 86 per cent chance of a quarter-point rise in interest rates at the Fed’s July meeting, according to CME’s FedWatch tool.
On Wednesday, Fed chair Jay Powell joined a panel of central bankers in Portugal, where he did not rule out the possibility of two consecutive rises in US interest rates.
The dollar hit its highest level in two weeks against a basket of six currencies, up 0.4 per cent.
“Dollar bulls will be licking their lips at the strength of today’s data, as this no doubt makes additional Federal Reserve interest rate hikes increasingly likely,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.
Wall Street’s benchmark S&P 500 added 0.3 per cent, while the tech-focused Nasdaq Composite slipped 0.2 per cent in mid-afternoon choppy trading.
Bank stocks rallied after the largest lenders passed the Fed’s annual stress test, proving they have enough capital to withstand a sharp economic downturn. Bank of America rose 2.2 per cent, while Wells Fargo and JPMorgan Chase added 4.6 per cent and 3.3 per cent respectively.
Earlier, the pan-European Stoxx 600 ended the day 0.1 per cent higher, while the CAC 40 added 0.4 per cent. London’s FTSE 100 slipped 0.4 per cent.
European investors cheered retail-focused stocks, with shares of H&M jumping 18 per cent after the Sweden-based fashion retailer said its second-quarter profits beat estimates even as inflation and high borrowing costs hit consumers this year.
Germany’s Dax was flat after the latest inflation data showed the rate of price growth in the eurozone’s largest economy rose to 6.8 per cent in June on an EU harmonised basis, slightly higher than the 6.7 per cent predicted by a consensus of economists polled by Reuters.
Yet investors took heart after Spanish inflation fell to 1.9 per cent year on year in June on an EU harmonised basis, making it the first of the eurozone’s large economies to record annual price rises below the ECB’s 2 per cent target since the war in Ukraine.
In Asia, equities edged lower, with Hong Kong’s Hang Seng index falling 1.2 per cent, while China’s CSI 300 dropped 0.5 per cent and Japan’s Topix lost 0.1 per cent.