Global stocks rally, dollar drops as US inflation data spurs optimism

Global stocks rallied as the dollar and bond yields slid further on Tuesday after more data signaled US inflation was coming off its peak, while an improving outlook for China's economy gave investors plenty to cheer.

Currencies gained against the greenback as the euro, yen and sterling all rose and the Canadian dollar hit an eight-week high after the Labor Department reported US producer prices increased less than expected in October.

Spot gold extended gains, euro zone and Treasury yields slid further and stock volatility in Europe (.V2TX) hit a fresh 10-month low as the US producer price index (PPI) for final demand rose 0.2%. In the 12 months through October, PPI increased 8.0 after climbing 8.4% the prior month.

Economists polled by Reuters had forecast monthly PPI rising 0.4% and advancing 8.3% year-on-year.

The reading was better than expected and bolstered the risk-off mood sparked last week by cooler-than-expected data on US consumer prices that gave investors hope the Federal Reserve can curb its aggressive interest rate hikes to tame inflation.

"The market is sniffing out the end of the Fed rate hike cycle," said Peter Duffy, chief investment officer of credit at Penn Capital Management Co LLC in Philadelphia. "The market is taking a big sigh of relief because the Fed has had to talk so tough. As soon as these numbers can start coming down, even if it's a slow walkdown in inflation, the market will be relieved."

Fed funds futures showed a further drop from above 5% last week in expectations for the US central bank's target rate, pricing in a peak at 4.88% next May and June. The likelihood the Fed hikes 50 basis points in December rose to a 91% probability, up from 71.5% last week.

MSCI's gauge of stocks across the globe (.MIWD00000PUS) gained 1.55%, while its emerging markets index (.MSCIEF) rose 2.35%.

On Wall Street, the Dow Jones Industrial Average (.DJI) rose 1.09%, the S&P 500 (.SPX) gained 1.64% and the Nasdaq Composite (.IXIC) added 2.44%.

Big moves in the dollar, among other assets, suggested investors were dramaticly changing their positions after the CPI and PPI reports, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"The pace and the momentum speaks to a major turn, and the euphoria!" he said. "It's like a big push on an open door. The pull-back we've seen, the dollar sells off last week sharply, some of the currencies were three standard deviation moves."

The euro up 0.53% to $1.038 and the yen strengthened 0.48% versus the dollar at 139.22.

The benchmark 10-year Treasury yield fell to a six-week low of 3.758% and was last down 5.5 basis points to 3.812%. The 10-year has fallen 30 basis points since Thursday.

Two-year yields , which reflect interest rate expectations, fell as low as 4.326%.

"Markets are driven by two factors at the moment. One is optimism that inflation data in the US is peaking out ... and on top of that we've had growing optimism that we could see China adopt more growth-friendly policies," said Lee Hardman, currency analyst at MUFG in London.

Chinese and Hong Kong stocks rallied overnight as investors digested China's COVID-19 policy adjustments, a property sector rescue package, and a cooling in tensions between the US and China. Beijing last week eased some of its strict COVID rules, though there has been a sharp increase in new infections in some cities this week.

Hong Kong's Hang Seng Index (.HSI) surged 4.11% overnight. The index is up nearly 25% for the month while China's CSI 300 (.CSI300) has gained 10% in that time.

US President Joe Biden and Chinese President Xi Jinping held a three-hour meeting on Monday in Bali on the sidelines of the G20 gathering. Investors welcomed the two countries' pledge of more frequent communications.

The market is reading that the Biden-Xi meeting is a watershed, but the US still sanctions Chinese semiconductors and Canada is getting tougher on Chinese investments in Canadian mining and metals sectors, Chandler said.

Data out on Tuesday showed that the British unemployment rate rose in September. German business sentiment saw a stronger-than-expected rise in the closely watched ZEW survey.

US crude fell 1.25% to $84.80 per barrel and Brent was at $92.09, down 1.13% on the day.

Bitcoin rose 2.69% to $17,036.00, but remained around 20% lower for the month. The collapsed FTX crypto exchange outlined a "severe liquidity crisis" in bankruptcy filings released on Tuesday.