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US Treasury yields edged lower and stocks advanced on Wednesday, as investors shrugged off higher than expected US inflation data.

Yields on interest rate-sensitive two-year US Treasuries fell to 4.98 per cent, from 5.04 per cent ahead of the consumer price data. Bond yields fall when prices rise.

The benchmark S&P 500 equity index rose 0.3 per cent and the technology-focused Nasdaq Composite gained 0.5 per cent after fresh data showed US consumer prices climbed at an annual rate of 3.7 per cent in August, up from 3.2 per cent in the previous month and marginally above analysts’ forecasts. Core inflation fell from 4.7 per cent to 4.3 per cent over the same period.

The dollar gave up earlier gains to trade flat against a basket of six peer currencies.

Despite the uptick, the overwhelming majority of market participants were still expecting the Federal Reserve to keep interest rates steady at its policy meeting next week.

“August’s rise in the US inflation rate is unlikely to prompt the Fed into raising interest rates further this month,” said Richard Garland, chief investment strategist at Omnis Investments. “The main impact on the headline inflation rate comes from rising energy prices but the Fed is likely to look through this given core inflation remains subdued and inflation expectations have been falling.”

Richard Flynn, managing director of Charles Schwab UK, said: “While it seems that the Fed may be finished with hiking rates in this cycle, today’s report is likely to reinforce their bias towards keeping rates high for an extended period, to avoid pushing inflation up further.”

Line chart of Yields on two-year US Treasuries (%) showing Yields on short-term US debt slip despite higher than expected inflation

An increase in the headline figure was expected as oil prices have climbed since June after oil exporters Saudi Arabia and Russia announced supply cuts in an effort to prop up prices.

International benchmark Brent crude was 0.2 per cent higher at $92.21 a barrel on Wednesday, touching a fresh 10-month high earlier in the day. The US equivalent West Texas Intermediate rose 0.1 per cent to $88.94.

Recent pressure on prices, however, has prompted traders to tip their bets in favour of another rate increase by the European Central Bank, which is due to announce its policy decision on Thursday. Swaps markets are now placing a 63 per cent probability that the central bank will increase eurozone interest rates by 0.25 percentage points to 4 per cent this week.

Yields on the policy-sensitive two-year German Bunds, a regional benchmark in Europe, rose 0.04 percentage points to 3.16 per cent on Wednesday.

If “the ECB does decide to hike tomorrow, they are more likely to indicate a willingness to pause thereafter, keeping the impact on the terminal rate fairly limited”, said Jason Davis, global rates portfolio manager at JPMorgan Asset Management.

Europe’s region-wide Stoxx 600 ended the day 0.3 per cent lower, extending losses from the previous session, while France’s CAC 40 and Germany’s Dax fell 0.4 per cent.

Asian markets edged lower on Wednesday, with China’s benchmark CSI 300 down 0.6 per cent while Hong Kong’s Hang Seng and Japan’s Topix each gave up 0.1 per cent.

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