GLOBAL MARKETS-Stocks gain, dollar falls after US jobs data; bond yields higher

By Caroline Valetkevitch and Samuel Indyk

NEW YORK/LONDON, Oct 2 (Reuters) - Major stock indexes rose and the dollar fell on Friday as expectations for an interest rate hike from the Federal Reserve later this month fell after softer-than-forecast US jobs data, while US bond yields were higher after reversing early declines.

Nonfarm payrolls increased by 29,000 jobs last month after a downwardly revised 133,000 rise in August, the Labor Department's closely watched employment report showed on Friday. Economists polled by Reuters had forecast payrolls advancing 90,000.

Bets on a second rate rise from the Fed this month faded after the data. Traders now see a roughly 21% chance that the Fed will hike rates by 25 basis points in October, compared with about 26% before the report. Expectations for a December hike also fell following the data, according to LSEG.

"It wasn't as hot a labor market print as August was," said Joseph Purtell, senior vice president, portfolio manager and rates trader at Neuberger.

Still, he said, "we broadly categorize this labor market as stable," and the report does not change that view.

Expectations for an October rate hike had already been declining going into Friday's jobs report. Two top policymakers said this week they wanted more data before deciding what to do next with interest rates.

The Nasdaq hit a record high early and was last up more than 1%. Lower oil prices added to bullish sentiment in stocks.

The Dow Jones Industrial Average .DJI rose 168.55 points, or 0.34%, to 51,097.30, the S&P 500 .SPX rose 52.03 points, or 0.68%, to 7,718.26 and the Nasdaq Composite .IXIC rose 306.18 points, or 1.14%, to 27,177.77.

MSCI's gauge of stocks across the globe .MIWD00000PUS rose 5.58 points, or 0.49%, to 1,138.84. The pan-European STOXX 600 .STOXX index rose 0.69%.

The dollar was down against the euro and yen. The euro was up 0.12% at $1.1255. Against the Japanese yen , the dollar weakened 0.2% to 157.76.

BOND YIELDS INITIALLY FALL AFTER DATA

US Treasury yields initially lost ground following the jobs data but were last higher on the day, with some investors noting the Fed could still likely raise rates again in the next six to nine months. The Fed raised rates in September for the first time since 2023.

Ten-year US yields registered their largest quarterly rise since 1994. Global bond markets have been under a sustained selloff in recent weeks as the US-Israeli war with Iran pushed up energy prices again, complicating the inflation outlook and further straining already stretched public finances.

The yield on benchmark US 10-year notes was last up 2.18 basis points at 5.256%, while the 2-year note yield, which typically moves in step with interest rate expectations for the Fed, was up 3.35 bps at 4.821%.

Trading on Friday remained volatile in European government bond markets, with the gap between the German and French 10-year yields hitting the widest level since the euro zone debt crisis in 2011.

German 2-year bond yields were last flat at 3.05%, having swung between session lows of 2.943% and highs of 3.063%, while French 2-year yields were around 4 bps higher at 3.73%, having risen to as much as 3.84% earlier. Italian 2-year yields were down 7 bps at 3.547%.

This week, 2-year German yields have fallen nearly a quarter point, while those on 2-year French bonds have risen nearly 14 bps.

OIL FALLS

Oil prices fell after reports of talks in Europe on additional diesel and crude stock releases, easing concerns over tight global energy supplies.

US crude fell 2.15% to $90.83 a barrel and Brent fell to $101.37 per barrel, down 0.92% on the day.

Spot gold fell 1.08% to $4,132.65 an ounce.