GLOBAL MARKETS-Stocks rally, yields fall on increasing Fed cut hopes

(Updated at 1:39 p.m. ET/ 1739 GMT)

By Alden Bentley and Chuck Mikolajczak

NEW YORK, May 3 (Reuters) - A gauge of global stocks rallied while Treasury yields fell on Friday after a U.S. payrolls report was softer than anticipated, easing concerns that recent data on inflation and the labor market would force the Federal Reserve to keep interest rates higher for longer.

Nonfarm payrolls rose by 175,000 last month, the lowest since October 2023, and short of the 243,000 estimate of economists polled by Reuters.

The 3.9% annual change in average hourly earnings was the smallest since May 2021 and continued a steady decline toward the mid-3% range, which policymakers feel is consistent with their 2% inflation target.

"The labor market just took one big step towards coming into better balance. There’s nothing wrong with payrolls rising by 175,000. The danger is that the move from hot to mild doesn’t stop there and it turns frigid," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"The risks would be greater if the Fed was still intent on hiking, but its patient pause keeps the risks of overshooting to the downside low."

On Wall Street, U.S. stocks rallied, with each of the three major indexes up more than 1% and the Nasdaq leasing the advance with a jump of nearly 2%.

Tech shares led sector gains, getting an additional boost from a jump of about 7% in Apple, after the iPhone maker reported its quarterly earnings and announced a record $110 billion stock buyback plan.

Of the 397 companies in the S&P 500 that have reported earnings through Friday morning, 76.8% have topped analyst expectations, according to LSEG data, compared with the 67% beat rate since 1997 and the 79% over the past four quarters.

The Dow Jones Industrial Average rose 463.95 points, or 1.21%, to 38,689.22; the S&P 500 gained 63.17 points, or 1.25%, to 5,127.31; and the Nasdaq Composite gained 310.12 points, or 1.96%, to 16,151.07.

Treasury yields fell, along with the dollar, after the payrolls report as investors increased expectations for a rate cut this year from the Fed in September, with markets pricing in a 66.8% chance for a cut of at least 25 basis points (bps), up from 61.6% in the prior session, according to CME's FedWatch Tool.

At the end of its policy meeting on Wednesday, the Fed indicated the next move in rates would be down, all but ruling out a rate hike.

The yield on benchmark U.S. 10-year notes fell 6.1 basis points to 4.51%, from 4.571% late on Thursday while the 2-year note yield, which typically moves in step with interest rate expectations, fell 6.5 basis points to 4.8119%, from 4.877%.

MSCI's gauge of stocks across the globe rose 8.67 points, or 1.14%, to 769.19 and was up 0.91% on the week, on pace for its second straight weekly gain.

In Europe, the STOXX 600 index closed up 0.46%, while Europe's broad FTSEurofirst 300 index ended 8.84 points, or 0.44%, higher.

Against the Japanese yen, the dollar weakened 0.48% at 152.89 while Sterling strengthened 0.1% to $1.2547.

The yen continued its recovery from 34-year lows, capping a tumultuous week that saw suspected intervention from Japanese authorities on two occasions.

Traders suspect the authorities stepped in on at least two days this week and data from the Bank of Japan suggests Japanese officials may have spent roughly $60 billion to defend the beleaguered yen, leaving trading desks across the globe on continued watch for further moves by the central bank.

In commodities, oil prices fell and were on course for their steepest weekly loss in three months following the jobs report.

U.S. crude lost 0.71% to $78.38 a barrel and Brent fell to $83.16 per barrel, down 0.61% on the day.

(Reporting by Chuck Mikolajczak and Alden Bentley; editing by Jonathan Oatis)