GLOBAL MARKETS-Wall St rallies, dollar dips as cool inflation data closes book on strong quarter

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(Updates to U.S. markets open, changes dateline to NEW YORK (previously LONDON)

By Stephen Culp

NEW YORK, June 30 (Reuters) - Wall Street surged on Friday and the dollar softened as investors prepared to close the books on the week, the month and the quarter with cooler-than-expected inflation data, which reassured markets that the Federal Reserve's restrictive monetary policy is working as intended.

All three major U.S. stock indexes were sharply higher, and were on track to post weekly, monthly and quarterly gains.

In the first half of 2023, the S&P 500 has advanced 15.5%, while the tech-heavy Nasdaq has ridden the AI wave, surging 31.3%. The Dow is on track for a more sedate 3.6% year-to-date gain.

"It's a nice cherry on top to the end of a great quarter and an even better start to 2023," said Ryan Detrick, chief market strategist at Carson Group in Omaha. "This was one of the best starts to the year ever for Nasdaq and large cap technology names, but let’s not forget they were the hardest hit group in the vicious bear market of 2022."

"It's almost the full year in one day, strength being led by tech names and a risk-on type of feel to it," Detrick added.

The Personal Consumption Expenditures (PCE) report from the Commerce Department showed cooler than expected inflation in May, while consumer spending abruptly decelerated, providing further evidence that the Fed's barrage of rate hikes are having their desired effect.

"It does signal that (the Fed’s) aggressive tightening schedule is likely to end soon," Detrick said.

Financial markets are still pricing in an 87% probability that the FOMC will implement another 25 basis point rate hike at the conclusion of its July policy meeting, according to CME's FedWatch tool.

The Dow Jones Industrial Average rose 205.45 points, or 0.6%, to 34,327.87, the S&P 500 gained 45.28 points, or 1.03%, to 4,441.72 and the Nasdaq Composite added 202.04 points, or 1.49%, to 13,793.38.

European stocks rose on China stimulus hopes, and extended their rally after the PCE report.

The pan-European STOXX 600 index rose 1.18% and MSCI's gauge of stocks across the globe gained 0.94%.

Emerging market stocks rose 0.34%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.27% higher, while Japan's Nikkei lost 0.14%.

The greenback lost ground against a basket of world currencies, capping two straight days of gains as the strong PCE report fueled optimism that the Fed is nearing the end of its tightening cycle.

The dollar index fell 0.55%, with the euro up 0.47% to $1.0915.

The Japanese yen strengthened 0.17% versus the greenback to 144.52 per dollar, while sterling was last trading at $1.2708, up 0.76% on the day.

U.S. Treasury yields softened on weaker-than-expected consumer spending data.

Benchmark 10-year note yields were last at 3.8543%, from 3.854% late on Thursday

The 30-year bond last rose 11/32 in price to yield 3.8916%, from 3.912% late on Thursday.

Crude prices reversed what was shaping up to be a fourth consecutive day of declines in the wake of the solid PCE report.

U.S. crude rose 1.3% to $70.77 per barrel and Brent was last at $75.26, up 1.01% on the day.

Gold prices rose in opposition to the softening dollar, but remained on track for their first quarterly decline in three.

Spot gold added 0.3% to $1,913.29 an ounce.

(Reporting by Stephen Culp Additional reporting by Huw Jones in London Editing by Mark Potter)

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