By Lawrence Delevingne

(Reuters) -Wall Street stocks mostly held on to their previous gains on Friday, while the dollar stayed near 15-month lows, after U.S. inflation data this week unleashed a wave of investor optimism that the U.S. Federal Reserve was nearing the end of its rate-hiking cycle.

Data showed on Wednesday U.S. consumer prices growing at their slowest pace in more than two years, and on Thursday the smallest increase in U.S. producer inflation in nearly three years. On Friday, the government reported that U.S. import prices dropped 0.2% last month, and U.S. consumer sentiment jumped to the highest level in nearly two years.

The MSCI World Equity index was little changed on Friday, staying at its peak for the year and its highest level since early 2022.

Wall Street stocks were muted following steady gains earlier in the week, after mixed quarterly reports from bank and other financial firms, offsetting gains in UnitedHealth Group and other health insurer stocks.

The Dow Jones Industrial Average rose 0.33%, to 34,509, the S&P 500 lost 0.10%, to 4,505 and the Nasdaq Composite dropped 0.18%, to 14,113.

European stock indexes were little changed, with the STOXX down 0.11% and London’s FTSE 100 down 0.08%. Germany’s DAX was down 0.2%, pulling back on recent gains.

Michele Morganti, senior equity strategist at Generali Investments in Rome, urged caution.

He said price-to-earnings ratios were “exuberant” versus real rates and economic growth, especially in the U.S.

“We are still cautious on equities short term due to sticky core inflation, tightening credit conditions and macro indicators pointing south,” Morganti said in an email.

BOND YIELD BOUNCE

U.S. government bond yields bounced back slightly on Friday after sharp declines earlier in the week. The yield on 10-year Treasury notes was up 6.3 basis points at 3.822%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 15 basis points (bps) at 4.761%.

Euro zone government bond yields were little changed on Friday, with bonds holding on to their gains after a powerful two-day rally triggered by soft U.S. inflation numbers.

Money market traders still expect the Fed to raise rates by 25 bps on July 26, but they have reduced the chances of another one after that this year.

Norman Villamin, chief group strategist at UBP, said he expected another Fed rate hike in July, but that the September meeting was more uncertain.

“We’re probably closer to the end of the cycle,” he said, although he added that above-target inflation was still expected to persist in the longer term.

“Getting the 3% (inflation reading) is one thing, getting back to 2% is going to be a much harder task,” Villamin said. “That puts a floor on how low bond yields can go again.”

LOWER DOLLAR HOLDS

The dollar hovered near a 15-month low on Friday, its biggest weekly decline since November after softening U.S. inflation data.

The euro was steady at $1.1223, having earlier touched its highest in more than 16 months.

Oil prices fell more than a dollar a barrel on Friday as the dollar strengthened and oil traders booked profits from a strong rally, with crude benchmarks recording their third-straight weekly gain.

U.S. crude fell 2% to $75.33 per barrel and Brent was at $79.75, also down about 2% on the day.

Gold prices eased, down about 0.3% on Friday, but were on track for their biggest weekly gain since April, after signs of slowing U.S. inflation.

(Reporting by Lawrence Delevingne in Boston and Elizabeth Howcroft in London; Editing by Nick Macfie, Alex Richardson and Josie Kao)

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