By Dhara Ranasinghe
LONDON (Reuters) - World stocks rallied on Tuesday, as traders held on to hope that interest rates will soon peak and come down later this year, even if latest U.S. jobs data supported the case for a May hike from the Federal Reserve.
Those hopes were fanned by an analysis in the International Monetary Fund's latest World Economic Outlook that suggested the
current high interest rates "are likely to be temporary" and predicted that, once inflation was brought under control, rates in advanced economies would eventually return to pre-pandemic levels.
Trading was largely sluggish as many markets reopened after a long holiday weekend. European stock markets opened broadly firmer, U.S. stock futures pointed to a positive open for Wall Street shares and Japan's blue-chip Nikkei rallied over 1%.
Supporting the case for global inflation easing further this year, data showed China's consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand remained weak.
South Korea's central bank held rates steady for a second consecutive meeting on Tuesday, while the Bank of Canada is expected to leave rates unchanged when it meets on Wednesday.
Friday's non-farm payrolls suggested labour markets remain resilient, boosting expectations for a 25 basis point (bps) U.S. rate increase in May. Markets price in a roughly 70% chance of a May hike, having last week priced such a move as a coin toss.
Traders still price in rate cuts by year-end as the economic growth outlook weakens, exacerbated by banking turmoil.
"It seems that we are currently in an environment that the world is looking at a soft landing and the need not to over tighten policy," said Nordea chief analyst Jan von Gerich.
"The payrolls number was strong enough to suggest that the economy could avoid a deeper recession but not too strong to suggest the Fed needs to tighten by much more."
U.S. March inflation data on Wednesday could provide the next steer for markets on the rate outlook.
The dollar was broadly softer, giving up some its post-payrolls gains.
The dollar eased 0.3% to 133.18 yen, after jumping 1.1% on Monday. The euro was 0.3% firmer at $1.089, while sterling rallied 0.35%.
Bitcoin touched a fresh 10-month high at $30,438 before pulling back to $30,148, after breaking free of recent ranges on Monday. The digital token had been stuck between about $26,500 and $29,400 for the previous three weeks.
NEW BOJ CHIEF
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.57%, while MSCI's world stock index was up 0.3%.
Japanese government bond yields mostly fell, after new Bank of Japan Governor Kazuo Ueda vowed to maintain the bank's ultra-loose monetary policy.
In his first speech after assuming office, Ueda on Monday said it was appropriate to maintain the bank's monetary policy for now as inflation has yet to hit 2% as a trend.
The 10-year JGB yield fell to as low as 0.445%, its lowest since April 4, after hovering at 0.465% in the previous session.
"His remarks gave investors a relief," said Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
In Europe, 10-year government bond yields jumped around 10 bps in early trade, as markets played catch up with the rise in U.S. yields following Friday's jobs data.
U.S. Treasury yields edged down in European trade with rate sensitive two-year yields last down 3 bps at 3.96%.
Elsewhere, oil prices rose on expectations of potential economic stimulus by China. Brent crude futures rose 61 cents, or 0.74%, to $84.81 a barrel, while U.S. WTI futures gained 68 cents, or 0.83%, to $80.41 a barrel.
(Reporting by Dhara Ranasinghe; additional reporting by Selena Li in Hong Kong and Junko Fujita in Tokyo; Editing by Simon Cameron-Moore)