By Saqib Iqbal Ahmed
NEW YORK (Reuters) - Global equity prices gained on Thursday after weak U.S. retail sales data undermined the argument that the Federal Reserve will raise interest rates next week.
The U.S. Treasury yield curve surged to its steepest levels in 2-1/2 months as longer-dated debt fell, highlighting expectations that the Fed could hold off from raising rates at its two-day meeting that concludes on Wednesday.
August U.S. retail sales fell more than expected, pointing to cooling domestic demand that further diminishes expectations for an interest rate increase next week.
"The disappointing retail sales numbers really reinforces our view that it would be difficult for the Fed to lift rates next week," said Bill Merz, an investment strategist at U.S. Bank Wealth Management in Minneapolis.
Also on Thursday, U.S. weekly jobless claims data showed a tightening labor market with subdued layoffs last week, while underlying producer price inflation crept up in August.
The gap between five-year note yields and 30-year bond yields <US5US30=TWEB> widened to 129.70 basis points, the steepest since June 27.
Expectations that the Fed will wait longer to raise rates is causing the long bond to underperform as lower rates are likely to boost inflation longer-term, which erodes the value of the debt.
Futures traders are pricing in a 12 percent chance of a rate increase this month, down from 15 percent on Wednesday, according to the CME Group’s FedWatch tool. Friday's consumer price inflation data is the next economic focus.
MSCI's world stocks index <.MIWD00000PUS>, which tracks shares in 45 nations, rose 0.73 percent. It was boosted by a buoyant Wall Street, which rose on views that the latest economic data hurt the case for a rate hike.
"These things are not pointing to the need for the Fed to raise interest rates in September. That's one of the reasons you're seeing a relief rally today," said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.
The Dow Jones industrial average <.DJI> rose 177.71 points, or 0.99 percent, to finish at 18,212.48, the S&P 500 <.SPX> gained 21.49 points, or 1.01 percent, to close at 2,147.26 and the Nasdaq Composite <.IXIC> added 75.92 points, or 1.47 percent, to end at 5,249.69.
Apple's shares rose as much as 3.5 percent and gave the three major indexes their biggest boost after the company said that the first batch of its new iPhone 7 Plus sold out globally.
European shares finished the day higher in choppy trading, with UK supermarket Morrisons <MRW.L> leading gainers following a strong earnings update. Europe's broad FTSEurofirst 300 index <.FTEU3> closed up 0.55 percent at 1,339.13.
Stocks in Tokyo closed at a three-week low amid uncertainty over interest rate policy.
Oil prices rose about 1 percent, tracking a rally in gasoline futures. A delayed restart of the main gasoline line at Colonial Pipeline, the No. 1 carrier for the motor fuel in the United States, pushed that market higher.
Brent crude <LCOc1> settled up 74 cents, or 1.6 percent, at $46.59 a barrel, while U.S. crude <CLc1> settled up 33 cents, or 0.76 percent, at $43.91.
In currency markets, the U.S. dollar reversed early gains against the yen as traders doubted that the Bank of Japan would be able to weaken the yen with more policy stimulus at its policy meeting next Wednesday.
Profit-taking and gains in commodity currencies also weighed on the greenback. The U.S. dollar <.DXY> was little changed against a basket of major currencies.
On Thursday, the Swiss National Bank and the Bank of England both held fire, without any further moves to support growth or weaken their currencies.
Spot gold fell to a two-week low <XAU=>, trading down 0.7 percent to $1,313.31 an ounce.
(Reporting by Saqib Iqbal Ahmed; Additional reporting by Karen Brettell in New York and Noel Randewich in San Francisco; Editing by Nick Zieminski and Dan Grebler)