Global stocks rally, Europe at record highs, dollar gains

A gauge of global equity markets neared a record high on Friday in anticipation of central bank interest rate cuts and strong corporate earnings, while the dollar rose despite signs of slowing U.S. economic growth.

European shares posted their biggest weekly gain since late January, with the pan-regional STOXX 600 index SXXP rising for a sixth straight session, while the Dow industrials DJI were on track to register eight daily advances in a row as Wall Street turned mixed after early gains, with the Nasdaq lower.

Strong performance on both sides of the Atlantic, along with gains overnight in Tokyo and elsewhere in Asia, pushed MSCI's all-country world index (.MWID00000PUS) within 0.3% of a record closing high.

Driving Wall Street higher are better-than-expected U.S. corporate results and the likelihood for the Federal Reserve to cut interest rates this year, said Thomas Hayes, chairman and managing member at Great Hill Capital in New York.

"Higher jobless claims than expected yesterday put the Fed on its back foot. The Fed not only is watching inflation, but if they saw some weakening in the jobs market, that would potentially be cause to move ahead with cuts," Hayes said.

"There's still the likelihood we're going to see one or two this year."

MSCI's gauge of stocks across the globe EURONEXT:IACWI rose 0.31% while Europe's STOXX 600 SXXP index closed up 0.77%.

The Dow Jones Industrial Average DJI rose 0.28%, the S&P 500 SPX gained 0.14% and the Nasdaq Composite IXIC lost 0.04%.

The dollar pared initial declines and turned modestly higher as investors assessed a reading on U.S. consumer sentiment and sifted through a flurry of comments from Fed officials.

The University of Michigan's preliminary reading of consumer sentiment came in at 67.4 for May, a six-month low and below the 76.0 estimate of economists polled by Reuters. In addition, the one-year inflation expectation climbed to 3.5% from 3.2%.

"The U.S. exceptionalism trade is fading. We did see a decline yesterday based on the higher-than-expected rise in jobless claims," said Karl Schamotta, chief market strategist at Corpay in Toronto.

"The underlying trend here does look as if the dollar's essentially peaking here and then it might decline."

The dollar index DXY, which measures the U.S. currency against a basket of six peers, gained 0.07% to 105.29. The euro EURUSD slid 0.07% to $1.0773, while the yen USDJPY weakened 0.25% to 155.83 per dollar.

The pound was poised for a modest weekly loss after the Bank of England on Thursday paved the way for the start of rate cuts as soon as next month and data showed the British economy exited a mild recession in the first quarter of this year.

INFLATION AHEAD

Markets await both next week's producer price index and the consumer price index for signs that U.S. inflation has resumed its downward trend toward the Fed's 2% target rate.

Hotter-than-expected inflation reports last month had quashed any lingering expectations of near-term U.S. rate cuts. Markets are now fully pricing in a cut only in November, though there is still a chance of the Fed moving in September.

In contrast, markets now imply a 50-50 chance of a BoE cut in June and are almost fully priced for August. They also imply an 88% chance the European Central Bank will ease in June.

BOE Governor Andrew Bailey said there could be more reductions than investors expect, the latest sign of the growing divergence between the Europe and U.S. rate outlooks.

Sterling GBPUSD strengthened 0.02% to $1.2524, having touched a more than two-week low of $1.2446 on Thursday.

Traders currently anticipate roughly 45 basis points of cuts this year from the Fed. In comparison, traders are pricing in 58 bps of easing from the BoE this year, while anticipating 70 bps of cuts from the ECB. (0#BOEWATCH), (0#ECBWATCH), (FEDWATCH)

Treasury yields rose as traders waited on next week's key April inflation data to guide expectations of Fed monetary policy.

Yields hit one-month lows last week after a softer-than-expected employment report for April reignited bets that the U.S. central bank will make two 25 basis point interest rate cuts this year.

The yield on benchmark 10-year Treasury notes US10Y rose 5.5 basis points to 4.504%, while the two-year yield (US2YT=RR), which typically moves in step with interest rate expectations, rose 6.1 basis points to 4.8676%.

Oil prices fell by about $1 a barrel as comments from Fed officials indicated higher-for-longer interest rates, which could hinder demand from the world's largest crude consumers.

U.S. crude futures CL1! fell $1.00 to settle at $78.26 a barrel and Brent BRN1! settled down $1.09 at $82.79 a barrel.

Gold prices rose, en route to their best week in five, with zero-yield bullion building on momentum fueled by weaker U.S. jobs data this week that reinforced expectations for the Fed to cut rates this year.

U.S. gold futures GOLD for June delivery settled 1.5% higher at $2,375.00 per ounce.