Stocks up, yields retreat as investors eye slower manufacturing



(New throughout, updates prices, market activity and comments)

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U.S. stocks run higher after sell-off in September

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Oil surges on reduced supply outlook

By Pete Schroeder

WASHINGTON, Oct 3 (Reuters) - U.S. stocks and oil prices jumped on Monday as investors kicked off the final quarter of the year with a close eye on any potential economic slowdown.

All three major U.S. stock indices were up in midday trading, with the Dow Jones Industrial Average .DJI surging 2.09%. The S&P 500 .SPX was up 1.88%, while the Nasdaq Composite .IXIC added 1.44%.

The MSCI world equity index .MIWD00000PUS , which tracks shares in 45 nations, was up 1.485%.

Stocks rose after a brutal third quarter of steep declines. New data showing U.S. manufacturing activity grew at its slowest pace in nearly 2-1/2 years injected some life into stocks on the thought that economic weakness could slow inflation and ensuing efforts by the Federal Reserve to continue hiking interest rates.

"Traders are taking the view that bad news for the economy is good news for the stock market," said David Madden, market analyst at Equiti Capital. "High inflation is the reason why the Fed is tightening monetary policy and considering the fall in prices paid, we could be witnessing further signs that we are beyond peak inflation."

Investors will have a raft of new economic data to process this week, culminating in the monthly U.S. jobs report due Friday. As with manufacturing, signs of softening in that data could show rate hikes having their intended effect of slowing the economy and inflation, although Fed officials maintain they will not change course until price increases are under control.

"With the job market still looking quite tight and wage growth strong, it will take more than these soft monthly indicators to take the Fed off of the inflation-fighting warpath," said Bill Adams, chief economist for Comerica Bank.

OIL CLIMBS

Crude prices jumped after the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, said it would consider reducing output. Dropping supply expectations helped push Brent crude LCOc1 up 3.51% at $88.13 a barrel. U.S. crude CLc1 was up 4% at $82.70 per barrel.

News of the British government's decision to abandon plans for a tax cut helped push down yields on the benchmark U.S. 10-year Treasuries, which were last yielding 3.6406%.

Sterling jumped against the dollar Monday on Britain's tax cut reversal, reversing a brutal drop and surging nearly 1% in afternoon trading. The safe-haven dollar also took a broader step back Monday, with the dollar index .DXY , which tracks the greenback versus a basket of six currencies, falling 0.23%.

Dips in Treasury yields and the dollar also helped gold prices climb, with spot gold prices XAU= rising 1.91% to $1,691.30 an ounce.



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Reporting by Pete Schroeder; Editing by Hugh Lawson, David
Evans, Jonathan Oatis and David Gregorio



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