Shares gain, dollar down after moderate US CPI

By Herbert Lash and Samuel Indyk

NEW YORK/LONDON (Reuters) -Global shares and gold rose while the dollar eased on Thursday after a moderate rise in July U.S. consumer price inflation bolstered the view that the Federal Reserve is at the end of its rate hiking cycle.

The consumer price index (CPI) gained 0.2% last month, the Labor Department said, lifting the annualized rate to 3.2% from 3% in June. Economists polled by Reuters expected headline CPI to rise to 3.3%.

The pace of core CPI, which strips out volatile food and energy prices, slowed to 4.7% in July from 4.8% the prior month.

Consumer price increases have decelerated from a peak of 9.1% in June 2022 and are now close to the Fed's inflation target of 2%.

"Today's report should support the idea that the Fed is likely to maintain its pause in September because inflation is continuing to decelerate even though we had the uptick in the headline because of higher energy prices," said Russell Price, chief economist at Ameriprise Financial Services Inc in Troy, Michigan.

"All the other components are more broadly trending in the right direction."

The main Wall Street stock indices jumped, as did the major German, French, Italian and Spanish indices. Treasury yields eased, taking pressure off gold prices, as bets that the Fed is done hiking rates increased.

The August unemployment and CPI reports will come out before the Fed's next policy meeting in late September, but at the moment the doves calling for a hiking pause appear to have the upper hand, said Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co in Conshohocken, Pennsylvania.

"There was clearly disagreement among the FOMC at the June meeting and the doves said, 'let's pause and see how much new data we can get'," he said. "Let's wait and see has been reinforced. The doves are winning."

MSCI's gauge of stock performance across the globe gained 0.67%, while the pan-European STOXX 600 index rose 0.78%.

On Wall Street, the Dow Jones Industrial Average rose 0.72%, the S&P 500 gained 0.69% and the Nasdaq Composite added 0.75%.

The foreign exchange market also moved on the news, with the dollar index, a measure the U.S. currency against six peers, extending losses to as low as 101.76 and was last down 0.18% 102.30. The euro rose 0.36% to $1.1013.

Treasury and European bond yields fell, with the U.S. 10-year benchmark up 1.7 basis points at 4.024%, below the 4.0% floor it has mostly traded above since Aug. 1.

Germany's 10-year yield, the euro zone's benchmark, trimmed earlier gains and was last up 3.4 basis points at 2.500%.

CHINA WOES

Asian stocks overnight remained near a two-week low, still reeling from China's slip into deflation and an announcement of a U.S. ban on investments in China in sensitive technologies like computer chips.

"It looks like the passive investments or investments in public equities and China are not going to be proscribed," Conger said.

"There is a sigh of relief because global investors from the U.S. definitely didn't want to have to cope with an executive order that was contrary to their benchmark," he said.

MSCI's broadest index of Asia-Pacific shares outside Japan was little changed and looked set to log a second straight week of losses. A technology sub-index fell to its lowest in more than two months.

Chinese data on Wednesday showed deflation at the consumer-price level and further declines for factory-gate prices in July, exacerbating concerns about the sputtering nature of the post-pandemic recovery.

China is the first G20 economy to report a year-on-year decline in consumer prices since Japan's last negative headline CPI reading in August 2021.

It highlights "the need for more fiscal support, if Beijing wants to avoid the prospect of a deflationary trap," said Rodrigo Catril, senior currency strategist at National Australia Bank.

Oil prices stabilized, with Brent crude holding close to January highs, as speculation about further Fed rate hikes faded and OPEC remained positive on the oil demand outlook.

U.S. crude fell 0.89% to $83.65 per barrel and Brent fell 0.57% to $87.05.

(Reporting by Herbert Lash, additional reporting by Samuel Indyk in London and Ankur Banerjee; Editing by Edwina Gibbs, Sam Holmes, Susan Fenton, Alexandra Hudson and Richard Chang)