Updates prices to Asia afternoon

By Tom Westbrook

SINGAPORE, July 15 (Reuters) - Stocks rose and bonds steadied on Wednesday after a surprise slowdown in U.S. inflation scaled back expectations for interest rate hikes, while oil took a breather as the U.S. scrapped a plan to levy shipping through the Strait of Hormuz.

South Korea's volatile KOSPI .KS11 index surged 6% and Japan's Nikkei .N225 rose 1%, but volume was light and the mood nervous as AI stocks' momentum has started to stutter.

ASML ASML.AS, Europe's most valuable company and the world's biggest supplier of chipmaking equipment, beat revenue expectations and is likely to set the tone at the European open.

European futures STXEc1 were down 0.2% and FTSE futures FFIc1 fell 0.3%, while Nasdaq futures NQc1 rose 0.8%.

On Tuesday, U.S. headline consumer price index fell 0.4% in June, its first decline since the COVID-19 pandemic, while core inflation for the month was flat.

Bond yields and the dollar fell on the figures, leaving the euro EUR= comfortably above $1.14 on Wednesday and 2-year Treasuries US2YT=RR at 4.2%, about 9 basis points below Tuesday's 17-month high of nearly 4.3%.

"For market bulls this is even better than Goldilocks could have imagined," J.P. Morgan analysts said in a client note.

"This print should remove any fears over a July rate hike and may assuage fears on September, too. This sets up the market to move higher and to broaden as it does so."

Further moves, however, were dampened by Federal Reserve Chair Kevin Warsh who told Congress that one data point was not enough to declare victory over inflation.

A 25% drop in IBM's IBM.N share price after the technology company's revenue forecast missed analyst expectations also showed how stretched and skittish the market's rally in AI-related stocks has become.

"It doesn't take much for people to say, look, I've made a good profit here, I'll cut and run," said Damien Boey, portfolio strategist at Wilson Asset Management in Sydney.

'It's a winner-takes-all dynamic. So if you're looking like you're going to be left behind in this AI boom, you get absolutely hammered," he said.

"AI uncertainty is actually the highest of all the categories of uncertainty at the moment, and the sharp stock market reactions that you're seeing to results reflect that."

BANK EARNINGS BEAT

Stellar profit at Wall Street banks was the highlight of Tuesday's earnings calendar and on Wednesday Morgan Stanley, BNY, BlackRock BLK.N and Johnson & Johnson JNJ.N report earnings before the morning bell.

China's annual economic growth slowed sharply to 4.3% in the second quarter, official data showed on Wednesday, missing analysts' expectations as weak domestic demand outweighed stronger production and exports.

A rebound in Chinese retail sales in June, relatively strong nominal GDP and hopes that authorities will respond were the positives for investors.

"I don't think they will be worried enough to announce any big stimulus, but it is going to be targeted, since they are aware that growth is only for the tech areas whereas the broader economy is continuing to underperform," said UOB economist Woei Chen Ho.

China's yuan CNY=CFXS traded at a one-month high of 6.7635 to the dollar. Elsewhere in currencies, the Australian dollar AUD= was testing resistance around 70 cents and the struggling yen JPY= was pinned to the weak side of 162 per dollar.

Brent crude futures LCOc1 steadied around $85.80 a barrel, having gained almost 13% this week on a flare-up in Middle East fighting.

U.S. President Donald Trump reimposed a naval blockade of Iranian ports on Tuesday and threatened to attack power plants and bridges next week unless Iran resumes negotiations to end their conflict, though he scrapped a plan for a 20% fee on shipping through the Strait of Hormuz.