Hope for smaller rate rises lifts Wall Street, oil gains

By Sinéad Carew

NEW YORK (Reuters) - Wall Street stocks gained ground while the dollar eased as fresh signs of cooling inflation increased prospects that the Federal Reserve could slow down its rate hikes, even as officials warned the fight to tame rising prices is far from over.

Thursday's data showed U.S. producer prices unexpectedly fell in July amid a drop in the cost of energy products, after Wednesday's surprise news that consumer prices were unchanged in July due to a drop in gasoline prices.

Meanwhile, U.S. Treasury yields pared an earlier drop before the Treasury Department sells new 30-year bonds, even after the inflation data surprise.

Two straight days of slower inflation data gave investors hope that soaring prices were finally "peaking and heading in the right direction," according to Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

But he cautioned that this was a "one month data point."

"You'd still like to see a trend next month and see it's not necessarily just energy. You want to see other prices coming down. It's still early in the game," Saluzzi said.

The Dow Jones Industrial Average rose 208.84 points, or 0.63%, to 33,518.35, the S&P 500 gained 22.32 points, or 0.53%, to 4,232.56, and the Nasdaq Composite added 34.01 points, or 0.26%, to 12,888.82.

The pan-European STOXX 600 index was up 0.09% and MSCI's gauge of stocks across the globe gained 0.53%. Emerging market stocks rose 1.73%.

Despite the encouraging data, U.S. policymakers left no doubt they would continue to tighten monetary policy until price pressures were fully broken.

San Francisco Fed President Mary Daly, in an interview with the Financial Times, warned it is far too early for the U.S. central bank to declare victory in its fight against inflation and a half-percentage point rate rise in September was her baseline.

Daly's comments followed similar cautions from Minneapolis Federal Reserve Bank President Neel Kashkari and Chicago Fed President Charles Evans on Wednesday.

"What they're saying is prudent and smart," said Saluzzi, noting that because the Fed was slow to start its rate hiking cycle it would be careful not to end it too soon.

"They're playing catchup and don't want to make the same mistake they made earlier."

In currencies, the dollar extended losses against other major currencies after the inflation data prompted traders to dial back rate hike expectations.

The dollar index fell 0.209%, with the euro up 0.3% to $1.0328.

The Japanese yen strengthened 0.13% versus the greenback at 132.70 per dollar, while sterling was last trading at $1.2215, down 0.08% on the day.

In treasuries, benchmark 10-year notes last fell 16/32 in price to yield 2.8367%, from 2.781% late on Wednesday. The 30-year bond last fell 42/32 in price to yield 3.1111%, from 3.042%. The 2-year note last rose 1/32 in price to yield 3.1957%, from 3.214%. [US/]

In commodities, oil rose after the International Energy Agency raised its oil demand growth forecast for this year as soaring natural gas prices lead some consumers to switch to oil. [O/R]

U.S. crude recently rose 1.5% to $93.31 per barrel and Brent was at $98.83, up 1.47% on the day.

Spot gold dropped 0.2% to $1,788.15 an ounce. [GOL/]