By Lawrence Delevingne and Elizabeth Howcroft
(Reuters) -World stocks extended gains on Friday while the dollar held near 15-month lows after U.S. inflation data this week unleashed a wave of investor optimism that the U.S. Federal Reserve was nearing the end of its rate-hiking cycle.
Data showed on Wednesday U.S. consumer prices growing at their slowest pace in more than two years, and on Thursday the smallest increase in U.S. producer inflation in nearly three years. On Friday, the government reported that U.S. import prices dropped 0.2% last month.
As investors bet on a milder inflation outlook, the MSCI World Equity index rose to its highest so far this year. It was up 0.12% on the day on Friday, after a week of gains put it on track for its biggest weekly rise since November 2022 and its highest levels since early 2022.
In the U.S., positive earnings reports from major banks JPMorgan Chase, Citigroup and Wells Fargo boosted Wall Street’s stock indexes.
The Dow Jones Industrial Average rose 0.46% to 34,554.7, the S&P 500 gained 0.27% to 4,522.17 and the Nasdaq Composite added 0.37% to 14,191.27.
European stock indexes were mostly higher, with the STOXX up 0.15% and London’s FTSE 100 up 0.5%. But Germany’s DAX was down 0.1%, pulling back on recent gains.
Michele Morganti, senior equity strategist at Generali Investments in Rome, urged caution.
He said price to earnings ratios were “exuberant” versus real rates and economic growth, especially in the U.S.
“We are still cautious on equities short term due to sticky core inflation, tightening credit conditions and macro indicators pointing south,” Morganti said in an email.
BOND YIELD BOUNCE
U.S. government bond yields bounced back slightly on Friday after sharp declines earlier in the week. The yield on 10-year Treasury notes was up 2.4 basis points to 3.783%.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 7 basis points at 4.679%.
Euro zone government bond yields were mostly lower, with the benchmark German 10-year yield at 2.454%.
Money market traders still expect the Fed to raise rates by 25 basis points on July 26, but they have reduced the chances of another one after that this year.
Norman Villamin, chief group strategist at UBP, said he expected another Fed rate hike in July, but that the September meeting was more uncertain.
“We’re probably closer to the end of the cycle,” he said, although he added that above-target inflation is still expected to persist in the longer term.
“Getting the 3% (inflation reading) is one thing, getting back to 2% is going to be a much harder task,” Villamin said. “That puts a floor on how low bond yields can go again.”
DOLLAR SLUMP CONTINUES
The dollar hovered near a 15-month low on Friday and was set for its biggest weekly decline since November after softening U.S. inflation data fuelled investors’ bets that the Federal Reserve was close to the end of its rate hike cycle.
The euro was steady at $1.1231, having earlier touched its highest in more than 16 months.
In oil markets, global benchmark Brent crude hovered around $81 a barrel on Friday, with bullish sentiment over U.S. demand bolstered by supply disruption in Libya and Nigeria.
U.S. crude recently fell 0.48% to $76.52 per barrel and Brent was at $80.99, down 0.45% on the day.
Gold edged lower on Friday, having gained in the previous five sessions as growing expectations of a pause in U.S. interest rate hikes set bullion on course for its biggest weekly gain since April.
Spot gold dropped 0.2% to $1,957.29 an ounce. U.S. gold futures fell 0.17% to $1,955.80 an ounce.
(Reporting by Lawrence Delevingne in Boston and Elizabeth Howcroft in London. Editing by Jan Harvey)
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