Reports showing a moderate rise in a key US inflation gauge and continued manufacturing gains helped fire investor optimism on Friday, despite signs consumers' spirits were dampened by higher gasoline prices.
A steady rise in food and energy costs pushed overall US consumer prices up 0.7 percent in May, the sharpest rise in 1-1/2 years, a government report showed on Friday.
However, the core measure of the Labour Department's Consumer Price Index, which removes food and energy, rose just 0.1 percent, below Wall Street's median forecast of 0.2 percent. With volatile food and energy costs out of the picture, the muted price gains reassured financial markets that inflation remain under control. US stock and bond prices rose solidly in early trading, while the dollar was pressured by the soft inflation data. A year-on-year rise in core CPI of 2.2 percent was the lowest since 2.1 percent in March 2006.
"It's good news for the Fed. I still think they (will) worry a bit about inflationary pressures if growth were to pick up, but there is probably a bit more concern about the housing market given the rise in long-term (interest) rates over the last few weeks," said Scott Brown, chief economists at Raymond James & Associates in St. Petersburg, Florida.
The Federal Reserve has held benchmark US interest rates steady at 5.25 percent since last August, though a sell-off in the US bond market over the past week has pushed yields to five-year highs and renewed concerns about inflation.
Bond prices and yields move inversely. The Fed reported that May industrial output was flat and that businesses were running at 81.3 percent of capacity last month, partly because utility companies cut output and auto producers turned out fewer new vehicles.
There was no sign of letup in foreign interest in investing in US securities, according to a Treasury Department report that showed a net $111.8 billion were bought in April, up from $30.1 billion in March.
Elsewhere, the New York Federal Reserve Bank said New York state factory activity in June rose to its highest in a year after languishing for the prior three months.
The Empire State general business conditions index jumped to 25.75 in June from 8.03 in May. Economists polled by Reuters had expected a 10.8 reading for June.