(Recasts with U.S. markets, adds byline; dateline previous
LONDON)
By Herbert Lash
NEW YORK, March 14 (Reuters) - A benign reading of U.S.
inflation on Friday lifted the mood of financial markets,
U.S. Treasuries and stocks in Europe and the United States as
futures traded higher before the opening.
Stocks were seen adding to gains as plans emerged for a
financing for troubled U.S. brokerage firm Bear Stearns
<BSC.N>.
Favorable inflation data, which showed underlying inflation
was unchanged in February, boosted chances for a big interest
rate cut when Federal Reserve policy-makers meet next week to
spur the flagging U.S. economy.
Before the inflation numbers were released, world financial
markets had stabilized after a week of turbulence, with the
U.S. dollar inching up from historic lows and European stocks
holding steady.
The dollar rose against the yen and U.S. Treasury debt
prices extended gains following the release of data that had
been expected to show overall prices would rise 0.3 percent and
core prices would be up 0.2 percent.
Cheaper energy helped keep overall consumer prices as well
as vital core prices in check in February, the Labor Department
said.
"This is a huge downside surprise (in inflation measures),"
said Ken Landon, a foreign exchange strategist with JPMorgan
Chase in New York. "This gives further support for the Fed to
cut rate more aggressively."
European shares rose 1 percent, led by banks and miners,
and U.S. stock futures rose on the inflation news, which eased
concerns the U.S. economy was heading toward a period of low
growth and high inflation.
S&P 500 futures <SPc2> jumped 10.70 points, above fair
value, a pricing evaluation that accounts for interest rates,
dividends and time to expiration on the contract.
Dow Jones industrial average futures <DJc2> rose 67 points,
while Nasdaq 100 <NDc2> futures rose 18.00 points.
The probability of a large interest rate cut rose, with
U.S. short-term interest rate futures pointing to a 100 percent
perceived chance of a 75 basis-point cut in interest rates at
the Fed's next meeting on Tuesday.
To be sure, the unchanged reading of inflation caused
skepticism among a number of analysts and investors.
"Now we can all go on imagining there's no inflation and
the Fed can continue pretending that the rate cuts aren't going
to come at a cost. So the party goes on," said Michael Darda,
chief economist at MKM Partners LLC, Greenwich, Connecticut.
"The Fed was going to cut 75 basis points next week
regardless. This data just gives them more cover to do that it
with a straight face."
Financial and home builder shares gained, with JPMorgan
Chase <JPM.N> shares up 2 percent at $38.70 before the bell,
while Hovnanian <HOV.N> was up 3.3 percent at $10.40.
In Europe miners benefited from higher metal prices while
spot gold rose to within striking distance of the $1,000 mark
on Friday.
Rio Tinto <RIO.L> was the biggest weighted gainer, up 2.2
percent while BHP Billiton <BLT.L>, Anglo American <AAL.L> and
Xstrata <XTA.L> were up between 1.5 and 2.8 percent.
Financial stocks also gained, tracking their U.S.
counterparts overnight after rating agency Standard & Poor's
said that the end to subprime-related writedowns was in sight.
HSBC <HSBA.L> was up 0.9 percent, Societe Generale
<SOGN.PA> gained 1.9 percent and RBS <RBS.L> rose 0.7 percent.
The relative calm disguised investor stress over a U.S.
economic slowdown, banking strains, hedge fund failures and the
ongoing fallout from the eight-month old credit crisis.
Rising inflation had complicating the Fed's ability to cut
credit costs to ease the financial crisis. The combination of
lower Fed interest rates and rising inflation expectations has
undermined the dollar, which in turn is boosting oil prices and
import costs and exaggerating inflation further.
Oil slipped below $110 as investors took profits after
prices hit a record $111 on Thursday, but the depressed dollar
was seen limiting losses.
U.S. crude for April delivery <CLc1> fell 47 cents to
$109.86 a barrel after it touched a record for the seventh time
in a row in the previous session. Oil is up nearly 8 percent
this month and about 14.5 percent this year.
London Brent crude for April <LCOc1>, which expires later
on Friday, dropped 28 cents to $107.26.
"The market is waiting to see what will happen with the
dollar. The financial flows have been overwhelming the
fundamentals in the oil market," said Mike Wittner, Global Head
of Oil Market Research at Societe Generale.
further gains at the U.S. open.
Earlier, Japan's benchmark Nikkei <> average closed at
a more than 2-1/2 year low. It closed down 1.54 percent at
12,241.60. The broader TOPIX <> closed down by 1.9 percent
at 1,193.23.
(Reporting by Herbert Lash. Editing by Richard Satran)
