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(Reuters) – World stock markets 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, and U.S. consumer sentiment jumped to the highest level in nearly two years.
As investors bet on a milder inflation outlook, the MSCI World Equity index rose to its highest so far this year. It was up 0.1% 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.
Wall Street rose for the fifth straight day on Friday after some of the country’s top lenders, including JPMorgan Chase (NYSE:JPM) and insurer UnitedHealth Group (NYSE:UNH), kicked-off the second-quarter earnings season on a strong note.
The Dow Jones Industrial Average rose 0.45%, to 34,549.15, the S&P 500 gained 0.10%, to 4,514.5 and the Nasdaq Composite added 0.12%, to 14,155.78.
European stock indexes were little changed, with the STOXX down 0.11% and London’s FTSE 100 down 0.08%. Germany’s DAX was down 0.2%, pulling back on recent gains.
Michele Morganti, senior equity strategist at Generali (BIT:GASI) 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 5.7 basis points at 3.817%.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 14 bps at 4.751%.
Euro zone government bond yields were little changed on Friday, with bonds holding on to their gains after a powerful two-day rally triggered by soft U.S. inflation numbers.
Money market traders still expect the Fed to raise rates by 25 bps 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 was 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.”
LOWER DOLLAR HOLDS
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.
The euro was steady at $1.1232, having earlier touched its highest in more than 16 months.
In oil markets, global benchmark Brent crude hovered around $80 a barrel on Friday, with bullish sentiment over U.S. demand bolstered by supply disruption in Libya and Nigeria.
Brent was at $79.87, down 1.83% on the day; U.S. crude fell 1.91% to $75.42 per barrel.
Gold edged lower on Friday, having gained in the previous five sessions, as growing expectations of a pause in U.S. rate hikes set bullion on course for its biggest weekly gain since April. Spot gold % to $1,960.24 an ounce.
