NEW YORK, July 29 ― Wall Street stocks rallied yesterday, while Treasury yields fell for the third straight day as investors digested data showing a declining US economy for a second straight quarter, a day after the Federal Reserve hiked interest rates.

The dollar dropped to a six-week low against the yen, tracking the decline in Treasury yields, after the economic data, which fuelled speculation that the Fed will not raise rates as aggressively going forward.

US second-quarter gross domestic product (GDP) fell at a 0.9 per cent annualised rate, according to the Commerce Department's advance estimate. This compares with economist expectations for 0.5 per cent growth and came after a first-quarter contraction of 1.6 per cent.

The data followed a Fed commitment on Wednesday to not flinch in its battle against the most intense US inflation since the 1980s, even if that means a "sustained period” of economic weakness and a slowing jobs market.

US equities had also rallied on Wednesday as Fed Chair Jerome Powell's comments prompted bets that rate hikes would begin to slow and lead to rate cuts in 2023.

The decline in treasury yields yesterday implied bets for a more gradual pace of tightening going forward, according to Mona Mahajan, senior investment strategist at Edward Jones who also noted that GDP declined at a time when the Fed had not raised rates that much.

"It's certainly going to be an interesting balance between hopefully inflation moderating but then consumers having to face a more challenging economic backdrop,” Mahajan said.

"We don't see the scope for a deep and prolonged recession but the slowdown the market is pricing in is likely to come to fruition in the next couple of quarters, maybe even into the first quarter of 2023.”

While the S&P has "done a lot of the work to the downside to price in a moderate recessionary environment,” Mahajan sees more volatility ahead as "the fundamentals play a little bit of catch up.”

After starting the day weaker, US equities turned positive an hour into the trading session and took off from there.

The Dow Jones Industrial Average rose 332.04 points, or 1.03 per cent, to 32,529.63, the S&P 500 gained 48.82 points, or 1.21 per cent, to 4,072.43 and the Nasdaq Composite added 130.17 points, or 1.08 per cent, to 12,162.59.

MSCI's gauge of stocks across the globe gained 1.24 per cent.

Despite Europe facing a gas crisis and an expected recession, the pan-European STOXX 600 index rose 1.09 per cent.

In bond markets, two-year Treasury yields fell further yesterday after dipping under 3 per cent on Wednesday.

The spread between two- and 10-year Treasury yields, seen as a recession signal when the short end is higher than the long, narrowed yesterday. The spread had pulled back sharply on Wednesday.

Benchmark 10-year notes last rose 17/32 in price to yield 2.6723 per cent, from 2.732 per cent late on Wednesday. The 30-year bond last fell 12/32 in price to yield 3.0219 per cent, from 3.002 per cent.

The 2-year note last rose 6/32 in price to yield 2.8723 per cent, from 2.972 per cent.

In currencies, the dollar index fell 0.197 per cent, with the euro down 0.06 per cent to US$1.0196 (RM4.53).

"For now, the market is running with the idea that slowing growth will cause the Fed to blink and that we're entering a recession,” said Mazen Issa, senior FX strategist at TD Securities in New York.

The Japanese yen strengthened 1.71 per cent versus the greenback at 134.27 per dollar, while Sterling was last trading at US$1.218, up 0.24 per cent on the day.

As the euro contends with an energy crisis, the IMF warned that if Russia, which reduced gas delivery to Europe this week, completely cuts off supplies by year-end, the region could face zero economic growth next year.

Oil prices were mixed as concerns that a global recession would knock energy demand were offset by lower crude inventories and a rebound in US gasoline consumption.

US crude settled at US$96.42 per barrel, down 0.86 per cent while Brent settled up 0.49 per cent at US$107.14 on the day.

Spot gold added 1.3 per cent to US$1,756.59 an ounce as the US economic contraction boosted its safe-haven allure. ― Reuters