GLOBAL MARKETS-Stocks rally, oil prices drop after modest US inflation data solidifies Fed rate cut expectations

By Naomi Rovnick and Chibuike Oguh

NEW YORK/LONDON, Aug 12 (Reuters) - World shares rallied on Tuesday as U.S. consumer prices data failed to shake market expectations of an impending Federal Reserve interest rate cut in September, even as a trade war truce between Washington and Beijing helped buoy sentiment.

Wall Street's main indexes were all advancing after losing ground in the prior session, with financials, communication services, energy, industrials and materials driving gains. The Dow Jones Industrial Average .DJI rose 0.89%, the S&P 500 .SPX rose 0.56%, and the Nasdaq Composite .IXIC rose 0.60%.

European stocks .STOXX nudged higher, rising 0.19%. MSCI's gauge of stocks across the globe .MIWD00000PUS rose 0.56% to 943.41.

U.S. Labor Department data showed that the consumer price index rose 2.7% in 12 months through to July, which was slightly below the 2.8% rate that economists polled by Reuters had forecast.

"There was upside risk to inflation and the market was bracing for that in some respects," said James St. Aubin, chief investment officer at Ocean Park Asset Management in Santa Monica, California. "The report today, all things considered, was fairly benign. I don't think there was anything to write home about but it certainly took the worst-case scenario off the table."

Asian equities had rallied overnight after U.S. President Donald Trump signed an executive order pausing triple-digit levies on Chinese imports for another 90 days. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 0.19%.

Markets on Tuesday traded on short-term relief, however, as the softer-than-expected consumer price data firmed up bets for U.S. rate cuts. Traders are pricing in a 92% chance of a Fed cut in September, according to the CME Fedwatch tool.

Short-term U.S. Treasury bond prices rallied moderately, with the yield on two-year notes, which track interest rate expectations, down 1.1 bps at 3.743%. Longer-dated bond prices were lower. The yield on benchmark U.S. 10-year notes US10YT=RR rose 3.5 basis points to 4.308%.

Investors had been on tenterhooks about this batch of inflation data because it had followed a surprisingly weak jobs report on August 1, and had the potential to make concerns about U.S. stagflation a dominant global narrative.

Trump has nominated White House adviser Stephen Miran to temporarily fill a vacant board seat at the U.S. central bank, stirring up speculation about presidential interference in monetary policy.

The U.S. and China have engaged in a tit-for-tat tariff duel throughout the year, culminating in trade talks in Geneva, London and Stockholm since May that focused on bringing tariffs down from triple-digit levels.

Chinese exports jumped 7.2% year-on-year in July, beating the consensus forecast of economists polled by Reuters, but the nation's factory gate prices dropped by the most in two years in a further sign of manufacturers struggling to sell goods at home.

In currency markets, the dollar weakened 0.05% to 148.085 against the Japanese yen JPY=EBS and was down 0.5% against the Swiss franc CHF=EBS. The euro EUR=EBS rose 0.43% against the dollar at $1.166550.

The pound rose 0.5% against the dollar GBP=D3 to $1.34990 as traders anticipated the Bank of England lagging behind other non-U.S. central banks in implementing rate cuts.

The BoE cut benchmark borrowing costs by a quarter-point to 4% last week after a tightly balanced vote between members of its monetary policy committee, who also broadly agreed that the risks of an upward wages-and-prices spiral remained present.

Ten-year gilt yields GB10YT=RR rose by 5 bps to 4.624%.

In commodities, spot gold prices XAU= were flat at $3,344.60 per ounce after dropping nearly 1.6% on Monday in response to Trump announcing there would be no tariffs on imported gold bars. GOL/

Brent crude oil LCOc1 traded down 0.14% to $66.55 a barrel ahead of the August 15 meeting between Trump and Russian President Vladimir Putin, aimed at negotiating an end to the war in Ukraine. U.S. crude CLc1 fell 0.53% to $63.62 a barrel.