US inflation data lifts global stock markets, lowers Treasury yields

A gauge of global stocks climbed for the first time in four sessions on Friday as equities steadied after a sharp selloff and US economic data showed an improving inflation landscape, sending Treasury yields lower.

The Commerce Department said the personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, edged 0.1 per cent higher last month after being unchanged in May, matching estimates of economists polled by Reuters.

In the 12 months through June, the PCE price index climbed 2.5 per cent, also in line with expectations, after rising 2.6 per cent in May.

The data likely sets the stage for the Fed to begin cutting rates in September, as the market widely expects.

"The more recent trend is building upon the market's confidence that we are on a trajectory that would get us to 2 per cent over the long run," said Vail Hartman, interest rate strategist at BMO Capital Markets in New York.

"This is just another month of good inflation data from the Fed's preferred measure of inflation."

The Fed is scheduled to hold its next policy meeting at the end of July. Markets see a less than 5 per cent chance for a rate cut of at least 25 basis points (bps) at that meeting, but are fully pricing in a September cut, according to CME's FedWatch Tool.

On Wall Street, US stocks closed with strong gains, as small cap stocks were once again among the best performers in a market that continued its recent rotation into undervalued names.

However, megacap names also showed signs of stabilizing and the Nasdaq gained about 1 per cent after three straight days of declines that sent the index down nearly 5 per cent.

The Dow Jones Industrial Average rose 654.27 points, or 1.64 per cent, to 40,589.34, the S&P 500 gained 59.88 points, or 1.11 per cent, to 5,459.10 and the Nasdaq Composite gained 176.16 points, or 1.03 per cent, to 17,357.88.

Despite the gains, the S&P 500 was down 0.83 per cent for the week. The Russell 2000, however, secured a third straight week of gains in which it has surged 11.51 per cent, its strongest three-week performance since August 2022.

European shares closed higher, buoyed in part by corporate earnings after two consecutive sessions of declines, but still on track for a weekly decline.

MSCI's gauge of stocks across the globe rose 6.69 points, or 0.84 per cent, to 803.47 but was on pace for its second straight weekly fall.

The STOXX 600 index closed up 0.83 per cent but finished down 0.27 per cent on the week. Europe's broad FTSEurofirst 300 index ended 17.10 points, or 0.85 per cent, higher.

US Treasury yields were lower after the inflation data. The yield on benchmark US 10-year notes fell 6.2 basis points to 4.194 per cent its second straight daily fall, but was slightly higher on the week.

The 2-year note yield, which typically moves in step with interest rate expectations, fell 5.6 basis points to 4.3873 per cent for its fourth weekly decline in the past five.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, slipped 0.03 per cent at 104.30, with the euro up 0.1 per cent at $1.0855.

The greenback also weakened 0.1 per cent at 153.78 against the yen after the inflation PCE data and was on track for its biggest weekly percentage drop against the Japanese currency since early May.

The yen has strengthened on expectations a cut from the Fed is on the horizon while the Bank of Japan is expected to begin tightening policy by raising rates and reducing its bond purchases in the coming months. In addition, suspected BOJ intervention earlier this month also supported the currency.

Sterling strengthened 0.16 per cent at $1.2871. The Bank of England will also hold a policy meeting next week, although uncertainty surrounds what action the central bank may take with regard to rates.

US crude oil settled down 1.43 per cent to $77.16 a barrel and Brent fell 1.51 per cent on the day to end at $81.13 per barrel on declining Chinese demand concerns and hopes of a Gaza ceasefire agreement.