The surprise on-month drop in producer prices in March -- the biggest since April 2020 -- came a day after the consumer price index dropped more than expected, suggesting the central bank's tightening campaign was finally paying off.
A higher-than-forecast reading on jobless claims added to the positive mood, which helped send Wall Street's three main indexes rallying, including a two percent advance for the Nasdaq.
Investors are now betting the Fed will hike rates 25 basis points at its May gathering but possibly hold after that, with some still clinging to hopes it will even cut by the end of the year.
In a sign of cooling inflation elsewhere, Singapore's central bank kept rates steady, having previously hiked five times in a row. The move follows similar decisions in Australia, India, Canada and South Korea.
This week's data has reassured investors that US inflation is coming down and that the country's economy could be heading for a soft landing, even though minutes from the Fed's March policy meeting revealed some officials see a mild recession by the year's end.
"Coming fast on the heels of yesterday's better-than-expected (consumer prices) reading, today's (producer price index) print, plus the in-line jobless claims report, reinforces the view that the labour market continues to rebalance and that the post-pandemic inflation scare is ending," said SPI Asset Management's Stephen Innes.
"And as we move into the seventh-inning stretch, where arguably much could happen between now and the final pitch, the combination of progress on inflation and the softer labour market has been encouraging."
Innes added that markets seemed to be endorsing that view, with 10-year Treasury yields declining.
- 'Goldilocks situation' -
Paris dashed out of the blocks at the open and hit a record high of 7,500 points, while London and Frankfurt also rose.
Asian equities rose Friday, with Tokyo leading the way followed by Hong Kong, Shanghai, Sydney, Seoul, Taipei, Manila and Jakarta.
"The job market seems stable. And so what we're getting today is sort of an optimistic outlook that we're going to have almost like a Goldilocks situation where inflation's going to slow, but the economy is not crashing," said Que Nguyen of Research Affiliates.
Focus now turns to the release of US retail sales Friday, while corporate earnings season kicks off in earnest, with results from banking titans including JPMorgan Chase, Wells Fargo and Citigroup.
Traders are keenly awaiting their outlook statements in light of the upheaval in the banking sector last month that saw three US lenders go under and Credit Suisse bought by rival UBS.
With Thursday's data lowering expectations for where rates will top out, the dollar has come under pressure, hitting a one-year low against the euro. And it continued to struggle Friday, falling further versus the single currency, while the pound was at its best level since June.
"Given the strength of dollar selling this week, it would take a surprisingly strong rise in consumer sentiment, retail sales and inflation expectations to shake the dollar bears off before the weekend," said Matt Simpson at City Index.
Oil prices edged down but remain elevated since major producers' decision this month to slash output by more than a million barrels a day.
The OPEC+ group said Thursday the move had put world markets on course to be in deficit, which will widen as the year goes on, with China's reopening adding extra pressure.
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: UP 1.2 percent at 28,493.47 (close)
Hong Kong - Hang Seng Index: UP 0.5 percent at 20,438.81 (close)
Shanghai - Composite: UP 0.6 percent at 3,338.15 (close)
London - FTSE 100: UP 0.2 percent at 7,855.65
Euro/dollar: UP at $1.1067 from $1.1050 on Thursday
Pound/dollar: UP at $1.2530 from $1.2526
Dollar/yen: DOWN at 132.24 yen from 132.65 yen
Euro/pound: UP at 88.32 pence at 88.20 pence
West Texas Intermediate: DOWN 0.2 percent at $81.97 per barrel
Brent North Sea crude: DOWN 0.4 percent at $85.78 per barrel
New York - Dow: UP 1.1 percent at 34,029.69 (close)
-- Bloomberg News contributed to this story --
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