Stocks climb, dollar falls after U.S. inflation data

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By Chuck Mikolajczak

NEW YORK (Reuters) - A gauge of global stocks climbed on Thursday while longer-dated U.S. Treasury yields and the dollar fell after a reading of consumer prices added to expectations the Federal Reserve may have leeway to scale back the size of its interest rate hikes.

U.S consumer prices fell for the first time in more than 2-1/2 years in December amid declining prices for gasoline and other goods, suggesting inflation was on a sustained downward trend.

Still, a separate reading on the labor market showed weekly initial jobless claims came in at 205,000, below expectations of 215,000. Many market participants are looking for signs of weakness in the labor market as a key sign of slowing inflation.

On Wall Street, equities were choppy after the data, with the S&P 500 falling as much as 0.8% before rebounding.

The Dow Jones Industrial Average rose 267.21 points, or 0.79%, to 34,240.22, the S&P 500 gained 22.82 points, or 0.57%, to 3,992.43 and the Nasdaq Composite added 76.93 points, or 0.7%, to 11,008.60.

"The report confirms that inflation is in a downward trend and that it has reversed. In other words, it has peaked, and seems to be in a downward trend. That's a positive going forward," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

"If this continues, we can expect a less aggressive Fed which is good news."

The pan-European STOXX 600 index rose 0.63%, closing at its highest level since April 29, and MSCI's gauge of stocks across the globe gained 0.93% and was on track for a fifth straight session of gains, its longest streak since August.

Expectations for a 50 basis point rate hike at the next Federal Reserve meeting fell to 5.8% according to CME's FedWatch Tool, down from 23.3% the day prior. The market is pricing in a 94.2% chance of a 25 basis point hike, up from 76.7% on Wednesday.

The benchmark U.S. 10-year notes were down 11.2 basis points to 3.444%, from 3.556% late on Wednesday.

St. Louis Fed President James Bullard said the inflation data was a step in the right direction and the U.S. economy was primed for disinflation this year, but the road back to the central bank's 2% target would be bumpy. Richmond Federal Reserve president Tom Barkin echoed the sentiment about the data and said it allowed the Fed to "steer more deliberately".

The dollar index hit its lowest level since early June before paring losses, and was last down 0.824%, with the euro up 0.83% to $1.0844.

The Japanese yen strengthened 2.44% versus the greenback at 129.32 per dollar, while Sterling was last trading at $1.2213, up 0.58% on the day.

Crude prices rose in the wake of the data, getting an additional boost from optimism over China's emergence from its COVID-19 restrictions creating additional demand.

U.S. crude recently rose 1.47% to $78.55 per barrel and Brent was at $84.12, up 1.75% on the day.