Stocks rise, bond yields steady as ECB seen on hold

NEW YORK (Reuters) - Global equity markets rose on a fresh round of strong U.S. economic reports on Friday, while German bond yields edged up from record lows as expectations that the European Central Bank would ease monetary policy next week faded.

Although euro-zone inflation slid to a five-year low, the rate of decline was not enough to force the ECB to enact monetary stimulus, analysts said. The data initially put a damper on European shares until new signs of an improving U.S. economy led a rebound.

U.S. consumer spending fell in July for the first time in six months, but a rise in consumer sentiment in August to a seven-year high suggested the retrenchment was likely temporary.

Other data showed a sharp acceleration in factory activity in the Midwest, underscoring the U.S. economy's relatively strong fundamentals.

Charlie Smith, chief investment officer at Pittsburgh-based Fort Pitt Capital Group, said he sees room to run in the five-year bull market because the outlook for earnings and economic data continue to improve, even though some investors are convinced the market is overvalued.

"You put together all this sort of steadily improving positives in terms of the economy with the fact that people hate the fact that the market won't correct, and it just keeps going (up) and it appears like it's going to," Smith said.

European stocks closed higher, while Wall Street was mostly higher. MSCI's gauge of worldwide stock performance also rebounded, gaining 0.07 percent.

The Dow Jones industrial average fell 11.43 points, or 0.07 percent, to 17,068.14. The S&P 500 rose 3.16 points, or 0.16 percent, to 1,999.9 and the Nasdaq Composite added 14.70 points, or 0.32 percent, to 4,572.39.

The FTSEurofirst 300 index of top European shares closed up 0.33 percent at 1,373.82 points.

European bond yields fell sharply across the euro zone at the start of the week after ECB President Mario Draghi highlighted a significant drop in inflation expectations in a speech at a meeting of central bankers in Jackson Hole, Wyoming.

Draghi's comments raised expectations that the ECB would soon deploy a large-scale purchase of assets, known as quantitative easing, or QE. That view helped weaken the euro and boosted enthusiasm for stocks on both sides of the Atlantic.

"What people realize is that for the ECB to engage in public-sector QE ... the ECB has to see the whites of the eyes of deflation," said Wouter Sturkenboom, investment strategist at Russell Investments.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose half a basis point to 0.891 percent, having hit a record low of 0.86 percent on Thursday.

The benchmark 10-year U.S. Treasury notes rose 1/32 in price, pushing its yield down to 2.3290 percent.

The euro retreated, falling 0.33 percent to $1.3138, having risen as high as $1.3195 soon after the report on euro zone inflation.

Against the yen, the dollar was up 0.35 percent at 104.06.

U.S. crude oil rose for a fourth straight day as the Midwest manufacturing data pointed to strong demand.

Brent for October delivery settled up 73 cents to $103.19 a barrel. U.S. crude gained $1.41 to settle at $95.96 a barrel.

(Additional reporting by Marc Jones in London; Editing by Jonathan Oatis, Leslie Adler and Chris Reese)