Updated at 10:13 a.m. ET / 1413 GMT

By Chuck Mikolajczak

NEW YORK, July 26 (Reuters) - A gauge of global stocks rose for the first time in four sessions on Friday as equities steadied after a sharp selloff and U.S. economic data showed an improving inflation landscape, sending Treasury yields lower.

The Commerce Department said the personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, edged 0.1% higher last month after being unchanged in May, matching estimates of economists polled by Reuters.

In the 12 months through June, the PCE price index climbed 2.5%, also in line with expectations, after rising 2.6% in May.

The data likely paves the way for the Fed to begin cutting rates in September, as the market widely expects.

"Everybody's waiting to find out if the Fed is going to be confident enough to cut. If this doesn't make the Fed confident enough, nothing will," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"The economy is slowing and if they don't cut it could screech to a halt. They do have some time because certainly there's still some economic momentum but that economic momentum is fading fast."

The Fed is scheduled to hold its next policy meeting at the end of July. Markets see a less than 5% chance for a rate cut of at least 25 basis points (bps) at that meeting, but are fully pricing in a September cut, according to CME's FedWatch Tool .

On Wall Street, U.S. stocks were rallying in early trade, with small cap .RUT stocks once again leading gains as the market continues its recent rotation into undervalued names.

However, megacap names also showed signs of stabilizing, with the Nasdaq up nearly 1% after three straight days of declines that sent the index down nearly 5%.

The Dow Jones Industrial Average .DJI rose 555.71 points, or 1.39%, to 40,490.78, the S&P 500 .SPX gained 49.40 points, or 0.91%, to 5,448.62, and the Nasdaq Composite .IXIC gained 128.50 points, or 0.75%, to 17,310.23.

European shares were also higher after two consecutive sessions of declines, but still on track for a weekly decline.

MSCI's gauge of stocks across the globe .MIWD00000PUS rose 5.74 points, or 0.72%, to 802.52. The STOXX 600 .STOXX index rose 0.74%, while Europe's broad FTSEurofirst 300 index .FTEU3 rose 14.78 points, or 0.73%.

U.S. Treasury yields US10YT=RR were lower after theinflation data. The yield on benchmark U.S. 10-year notes US10YT=RR fell 6 basis points to 4.196% and was poised for a second straight daily fall, putting it on pace to decline for the week.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 5.8 basis points to 4.3853% and was heading for its fourth weekly decline in the past five.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.09% at 104.24, with the euro EUR= up 0.19% at $1.0865.

The greenback also weakenedagainst the yen after the inflation PCE data and was on track for its biggest weekly percentage drop against the Japanese currency since early May.

The yen has strengthened on expectations a cut from the Fed is on the horizonwhile the Bank of Japan is expected to begin tightening policy byraising rates and reducing itsbond purchases inthe coming months. In addition,suspected BOJ intervention earlier this month also supported the currency.

Sterling GBP= strengthened 0.09% at $1.2863. The Bank of England will also hold a policy meeting next week, althoughuncertainty surrounds what action the central bank may take with regard to rates.

U.S. crude CLc1 lost 1.43% to $77.16 a barrel and Brent LCOc1 fell to $81.2 per barrel, down 1.42% on the day.

Reporting by Chuck Mikolajczak, additional reporting by Sinéad Carew; editing by Mark Heinrich

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