(Updates prices)
* MSCI AC World index up 0.6%
* US retail sales fell in Oct, but less than forecast
* UK inflation falls to 4.6% in October
* China's factory output, consumption beat forecasts
* Fed funds futures price in rate cuts by May
NEW YORK/MILAN, Nov 15 (Reuters) - World shares extended gains on Wednesday and the dollar stemmed losses as expectations of an end to a global rate hike cycle spurred on investors following benign inflation readings in the U.S. and across Europe.
By the end of the session, the MSCI world equity index , which tracks shares in 49 countries, jumped 0.6% to its highest since mid-September, following a positive session in Europe and a rally across Asia, aided by a report of stimulus in China.
Stocks also rose across the board on Wall Street. The S&P 500 Index rose 0.2%, the Dow Jones Industrial Average added 0.5%, and the Nasdaq Composite Index narrowed earlier gains to end flat.
U.S. retail sales fell in October, though by less than expected, giving some investors cause to celebrate that the U.S. economy is poised for a so-called "soft landing" and that the Federal Reserve is likely done raising rates.
Recent U.S. data "supports our view that consumer price inflation will continue to fall more rapidly than many expect, even as activity in the real economy holds up under the weight of higher rates," economists at Capital Economics said in a note.
The pan-European STOXX 600 index gained 0.4% after data showed British inflation cooled more than forecast in October, hitting sterling and reinforcing bets the Bank of England will be cutting rates by the middle of 2024.
"Good weather seems to be back. The market is starting to price in the possibility of rate cuts in the United States and also in Europe," said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.
"I think the equity rally will continue into 2024 and so will bonds of course, subject to the international picture that remains complicated with the war in Ukraine, the Middle East and trade tensions with China," he added.
The British consumer price index rose by 4.6% in the 12 months to October, slowing from September's 6.7% increase, the Office for National Statistics said. Inflation in Italy and France also receded to an annual growth rate of 1.8% and 4.5% respectively last month, according to their statistics agencies.
On Tuesday, data showed U.S. headline consumer prices were flat in October, against expectations for a 0.1% rise. Core CPI, at 0.2%, also came in below a forecast of 0.3%.
"I think the CPI number has just pushed the last person to cover their shorts," Naka Matsuzawa, Nomura's chief macro strategist, said on the phone from Tokyo.
He sees a "more complicated" process ahead, where stock market exuberance eventually collides with bond market expectations that an economic slowdown will drive rate cuts.
DOLLAR SPUTTERS
The dollar sputtered after slumping on Tuesday following the softer U.S. inflation print. The dollar index, which measures the currency against a basket of peers, stood at 104.33, not far from Tuesday's two-month low of 103.98.
Interest rate futures swung to price in an interest rate cut by the Fed as early as May, with a 30% chance it could come even sooner, in March.
After dropping 19 basis points (bps) on Tuesday in their biggest one-day drop since March, 10-year Treasury yields bounced to 4.5333%. Ten-year German bond yields stood at 2.639%.
Sterling slid 0.72% to $1.24105 as the cooler inflation print helped the British currency reverse part of Tuesday's surge against a falling dollar. That helped London stocks outperform, up 0.62%. The euro inched around 0.25% lower at $1.08515.
CHINA SUPPORT
Adding to markets' cheer was strong industrial output and retail sales data in China and a report from Bloomberg News that China plans to provide 1 trillion yuan ($137 billion) of low-cost financing to boost the housing market.
MSCI's broadest index of Asia-Pacific shares outside Japan gained 2.85%, hitting its highest since mid-September. The Hang Seng rose nearly 4% in Hong Kong as mainland property developers rallied over 5%.
China's retail sales rose 7.6% in October, although that may have been flattered by the Golden Week holiday at the start of the month. Real estate remains in a deep funk, with investment in January-October down 9.3% year-on-year.
"It is clear that Beijing has been turning more proactive in recent weeks to help support the recovery," HSBC economists said in a note to clients. "With ongoing uncertainties highlighted by the property sector, we think Beijing will continue to step up support through both fiscal and monetary means."
The weaker dollar and the expectation of more stimulus in top metals consumer China kept London copper prices, hovering near a five-week peak scaled in the previous session. Iron ore rallied to a 2-1/2 year high in Shanghai and was last up 0.8%.
Brent crude futures reversed course to trade down 1.8% to $80.98 a barrel.
(Reporting by Danilo Masoni; additional reporting by Tom Westbrook in Singapore; Editing by Alex Richardson, Marguerita Choy, Deepa Babington and Daniel Wallis)
