By Herbert Lash
NEW YORK (Reuters) - A gauge of global stocks rose and bond yields edged higher on Tuesday as traders anticipate that interest rates will soon peak even as the market bets that the U.S. Federal Reserve will tighten monetary policy further in May to tame inflation.
Gold climbed back up above the key $2,000 per ounce level as the dollar came off Monday's peak, while oil prices rose despite Chinese inflation data pointing to persistently weak demand.
Investors are eagerly awaiting U.S. consumer prices data on Wednesday and producer prices on Thursday. The consumer price index is expected to show core inflation rose 0.4% on a monthly basis and 5.6% year-over-year in March, according to a Reuters poll of economists.
Core CPI appears likely to trough at 5.0% in September before moving higher, should the current path persist, as prices for services rise further, Jonathan Golub, chief U.S. equity strategist at Credit Suisse, said in a note.
GRAPHIC: Sticky prices vex central banks https://www.reuters.com/graphics/USA-FED/INFLATION/klpygmdrdpg/chart.png
The two-year Treasury yield, which typically moves in step with interest rate expectations, rose 5.2 basis points to 4.060% - double the Fed's inflation target of 2%.
"The bond market continues to move higher in price and lower in yield, anticipating a Fed pause in terms of interest rate hikes and a pivot at some point," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. "We think the bond market is way ahead of itself."
Futures show a 72.7% likelihood that the Fed will raise rates by 25 basis points to a range of 5.0%-5.25% when policymakers conclude a two-day meeting on May 3, CME Group's FedWatch tool shows.
But markets are pricing the Fed to cut its target rate to 4.416% by December as the economy slows and potentially enters a recession.
"The Fed could surprise us and pause" in May, Ghriskey said. "But they're very unlikely to roll over at this point. They are determined to crush inflation."
GRAPHIC: Not broken yet https://www.reuters.com/graphics/IMF-WORLDBANK/CENTRAL%20BANKS/egpbyladkvq/chart.png
The Fed should be cautious about raising rates in the face of recent banking stress, Chicago Fed President Austan Goolsbee said, noting that a pullback in bank lending would help quell inflation and leave less for monetary policy to do.
The U.S. central bank's policy path will depend on incoming data, New York Fed President John Williams said, adding that he had yet to see much sign of credit conditions tightening and it would take time to see how that played out.
The yield on benchmark 10-year Treasury notes rose 2.2 basis points to 3.437%, while the 10-year German bund's yield rose 0.9 basis points to 2.312%
Equity markets in Europe rallied after a long four-day Easter holiday, while the S&P 500 edged up and the Nasdaq slid. Large U.S. banks on Friday kick off earnings season that is expected overall to show a decline in profits, though banks are considered undervalued after a sell-off in March.
MSCI's gauge of stocks across the globe gained 0.61%. The pan-European STOXX 600 index closed up 0.62% and Japan's blue-chip Nikkei added 1.05%.
On Wall Street, the Dow Jones Industrial Average rose 0.5%, the S&P 500 gained 0.31% and the Nasdaq Composite dropped 0.07%.
Bolstering the case for global inflation to ease further this year, data showed China's consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand remained weak.
Meanwhile, investor morale in the euro zone improved in April after a surprise dip in March, a survey showed.
South Korea's central bank held rates steady for a second consecutive meeting on Tuesday, while the Bank of Canada is expected to leave rates unchanged when it meets on Wednesday.
The International Monetary Fund on Tuesday trimmed its 2023 global growth outlook slightly as higher interest rates cool activity but warned a severe flare-up of financial system turmoil could slash output to near recessionary levels.
Investor sentiment has also been boosted by signs that turmoil in the banking sector is easing after the two largest bank failures since the financial crisis rocked the banking system and rattled depositors, Fed data last week showed.
The dollar fell after a strong U.S. jobs report for March showed a resilient labor market, adding to expectations of another Fed rate hike. The data on Friday showed employers added 236,000 jobs while the unemployment rate fell to 3.5%.
The dollar index fell 0.244%, with the euro up 0.41% to $1.0904 and the yen weakening 0.12% at 133.78 per dollar.
Bitcoin touched a fresh 10-month high at $30,438 before pulling back to $30,250.00. The digital token had been stuck between about $26,500 and $29,400 the previous three weeks.
Elsewhere, U.S. crude rose $1.79 to settle at $81.53 a barrel, while Brent settled up $1.43 at $85.61.
U.S. gold futures settled 0.8% higher at $2,019.00 an ounce.
(Reporting by Dhara Ranasinghe; additional reporting by Selena Li in Hong Kong and Junko Fujita in Tokyo; editing by Simon Cameron-Moore, Will Dunham, Mark Heinrich and Alexander Smith)