Global stocks rise, U.S. bond yields hover at 8-week highs ahead of Fed

© Reuters. Pedestrians wait to cross a road at a junction near a giant display of stock indexes in Shanghai, China August 3, 2022. REUTERS/Aly Song

By David Randall and Marc Jones

NEW YORK (Reuters) - Better-than-expected economic data in Germany and gains in U.S. mega-cap growth stocks helped pushed world stock markets broadly higher Thursday while bond yields remained flat as investors waited for the Federal Reserve's annual Jackson Hole meeting for insights into the central bank's plans to combat inflation.

The Federal Reserve's annual monetary policy conference begins Friday in Wyoming. The focus sits squarely on how much higher U.S. interest rates might need to go and remain high if inflation does not significantly fall from its current 40-year highs.

"It's all treading water until we get a hold on what Fed chief (Jerome) Powell has to say at Jackson Hole," said Saxo Bank's head of FX strategy, John Hardy.

GDP data from Europe's largest economy, Germany, brought relief too. News that the country narrowly avoided a contraction in the second quarter and better-than-feared confidence data briefly lifted the battered euro back above dollar parity.

The euro fell back under $1 by the time details from last month's European Central Bank meeting - where it hiked its rates by a bumper 50 basis points (bps) - showed concerns among policymakers that inflation is becoming entrenched.

MSCI's gauge of stocks across the globe rose 0.68% following gains in Europe and Japan.

On Wall Street, the Dow Jones Industrial Average rose 31.01 points, or 0.09%, to 33,000.24, the S&P 500 gained 21.5 points, or 0.52%, to 4,162.27 and the Nasdaq Composite added 100.25 points, or 0.81%, to 12,531.78.

Borrowing costs in bond markets eased slightly, too, following a hectic few days that have seen another sharp surge, especially in Europe where gas prices have now more than tripled since June as Russia has reduced its supply. [GVD/EUR]

Germany's 10-year yield dipped around 3 basis points (bps) to 1.33% after touching 1.39%. Italy's 10-year yield nudged down to 3.58% and U.S. yields, which are the key driver of global borrowing costs, hovered near its eight-week high of 3.10%, compared with 2.51% at the start of the month.

JACKSON HOLE

Investors have pared back expectations the Fed could tilt to a slower pace of rate hikes as U.S. inflation remains at 8.5% on an annual basis, well above the Fed's 2% target. But Powell's speech due on Friday will be scrutinized for any indication that an economic slowdown might alter the Fed’s strategy.

Investors now expect the Fed Funds rate to peak at 3.80% in March 2023, up from 3.62% a fortnight ago, said Tapas Strickland, NAB's economics director.

"Given the extent of this week’s sell-off thus far, a hawkish takeaway from Wyoming appears to be the consensus and, arguably, priced in with some degree of confidence," said Ian Lyngen, head of U.S. Rates Strategy at BMO Capital Markets.

Interest rate futures imply a 60% chance of a 75 bp Fed hike in September, up from 50% earlier this week. Euro zone money markets are now pricing in around 100 bps of ECB rate hikes by October, including a slight chance of 75 bps move next month.

"Equities markets at the moment see bad news about the economy as being essentially good news because to them it means that the Fed might not tighten as much as thought," said Rob Subbaraman, Nomura's head of global macro research.

"But equities markets could have to reassess that after Jackson Hole."

In the currency markets, the dollar was down 0.25% having been down as much as 0.5% earlier, including 0.4% against the euro and to 136.62 yen. China's yuan also nudged away from a two-year low.

U.S. crude recently fell 0.03% to $94.86 per barrel and Brent was at $101.83, up 0.6% on the day.

Deutsche Bank (ETR:DBKGn) strategist Jim Reid said the worry was that the energy situation in Europe keeps getting worse.

"That’s adding to fears that “peak inflation” might not actually have arrived yet for some countries," he said. "Policymakers are about to face some unenviable choices as they grapple with the worst stagflation we’ve seen in decades."