LONDON: World stocks extended their gains on Friday, while the dollar held near 15-month lows, after US inflation data earlier in the week unleashed a wave of investor optimism that the US Federal Reserve was nearing the end of its rate-hiking cycle.
Data on Wednesday showed US consumer prices growing at their slowest pace in more than two years, then on Thursday data showed the smallest increase in US producer inflation in nearly three years.
As investors bet on a milder inflation outlook, the MSCI World Equity index rose to its highest so far this year. On Friday it was up 0.2 per cent on the day, after a week of gains put it on track for its biggest weekly rise since November 2022 .
European stock indexes were mostly higher, with MSCI's Europe index up 0.3 per cent, the STOXX 600 up 0.1 per cent and London's FTSE 100 up 0.2 per cent. But Germany's DAX was down 0.2 per cent, pulling back on recent gains.
The positive momentum was set to continue into Wall Street, with S&P 500 futures up 0.1 per cent and Dow futures up 0.4 per cent.
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 per cent (inflation reading) is one thing, getting back to 2 per cent is going to be a much harder task," Villamin said. "That puts a floor on how low bond yields can go again."
Another factor cited by UBP's Villamin for the recent equity market rally has been a swell of liquidity from the Federal Reserve system.
The Fed's reserve repo account, which is where eligible firms can park cash at the central bank in exchange for risk-free return, stands at $1.8 billion, down from $2.3 billion at the end of April, according to Refinitiv data, indicating $500 billion of liquidity has come back into markets in that time.
The US dollar index was at 99.821, holding near the 15-month low of 99.574 hit earlier in the session and set for its biggest weekly decline since November. The euro was steady at $1.1226, having earlier touched its highest in more than 16 months.
Meanwhile the Swedish crown was set for its biggest weekly gain against both the dollar and euro in 14 years .
Euro zone government bond yields were mostly lower, with the benchmark German 10-year yield at 2.439 per cent.
Oil prices were a touch higher, helped by bullish sentiment over US demand. Brent and WTI futures were both up by less than 0.1 per cent .
Gold was on track for its best week since April, also helped by dollar weakness and boosted by expectations for the end of US interest rate hikes.
Investor attention now turns to US bank earnings. JP Morgan Chase and Wells Fargo shares were up after they reported a jump in second-quarter profit. - Reuters
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