Wall Street rallies, dollar surges as data cements Fed pause bets

By Stephen Culp

NEW YORK (Reuters) – U.S. stocks ended sharply higher and the greenback jumped on Thursday as robust economic data failed to budge expectations that the Federal Reserve will leave its key interest rate unchanged next week.

The rally boosted a broad array of assets. All three major stock indexes ended higher, as did all 11 major sectors of the S&P 500.

The dollar jumped to a six-month high, 10-year Treasury yields rose, and crude oil futures hit their highest this year, helping energy stocks outperform the broader market.

A spate of economic data released before the opening bell showed energy prices, specifically gasoline, were largely responsible for a hotter-than-expected producer prices print and a consensus-beating retail sales reading.

“There’s a reason why the Fed focuses on core inflation,” said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder in New York. “Food and energy prices are volatile and seasonal, so (the PPI report) won’t change their actions in the coming period.”

“Core PPI continued to slow on a year-to-year basis and retail sales were stronger,” Ghriskey added. “This is not a weak economy.”

The European Central Bank (ECB) hiked its key interest rate to a record high, but also hinted that this latest increase would be its last.

“Once one central bank decides they’re going to pause, everyone gets on board,” said Michael Green, chief strategist at Simplify Asset Management in Philadelphia. “There’s a general sense that the rate hiking cycle is done for now.”

Financial markets have baked in a 97% likelihood of the Fed holding the fed funds target rate steady at 5.25%-5.50% at the conclusion of next week’s monetary policy meeting, and a growing 66.7% chance of holding firm at the November meeting to follow, according to CME’s FedWatch tool.

The Dow Jones Industrial Average rose 331.98 points, or 0.96%, to 34,907.51, the S&P 500 gained 37.73 points, or 0.84%, to 4,505.17 and the Nasdaq Composite added 112.47 points, or 0.81%, to 13,926.05.

European stocks jumped to their biggest one-day percentage gain in six months, after the ECB – hiking interest rates for the tenth straight time – suggested it was at the end of its monetary policy tightening cycle.

The pan-European STOXX 600 index rose 1.52% and MSCI’s gauge of stocks across the globe gained 0.82%.

Emerging market stocks rose 0.71%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.66% higher, while Japan’s Nikkei rose 1.41%.

The dollar jumped to a six-month high against a basket of world currencies in the wake of the stronger-than-expected U.S. economic data, and following on euro weakness following the ECB rate decision.

The dollar index rose 0.57%, with the euro down 0.8% to $1.0642.

The Japanese yen strengthened 0.01% versus the greenback at 147.46 per dollar, while sterling was last trading at $1.2408, down 0.64% on the day.

U.S. Treasury yields inched higher, as investors digested the PPI and retail sales reports.

Benchmark 10-year notes last fell 11/32 in price to yield 4.2903%, from 4.248% late on Wednesday.

The 30-year bond last fell 26/32 in price to yield 4.3869%, from 4.337% late on Wednesday.

Oil prices surged to their highest since November as a tighter supply outlook offset demand concerns.

U.S. crude jumped 1.85% to settle at $90.16 per barrel, while Brent finished at $93.70 per barrel, up 1.98% on the day.

Gold prices rebounded after an initial dip in opposition to the strengthening greenback.

Spot gold added 0.2% to $1,909.08 an ounce.

(Reporting by Stephen Culp; Additional reporting by Marc Jones in London; Editing by William Maclean and Marguerita Choy)