Stocks gain, yields fall after U.S. inflation data

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By Danilo Masoni and Tom Westbrook

MILAN (Reuters) - A gauge of global stocks rose on Thursday while U.S. Treasury yields and the dollar fell after a reading of consumer prices fueled expectations the Federal Reserve may have room to dial back the size of its expected interest rate hikes.

U.S consumer prices unexpectedly fell for the first time in more than 2-1/2 years in December amid declining prices for gasoline and other goods, suggesting that inflation was now 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 .DJI rose 120.63 points, or 0.36%, to 34,093.64, the S&P 500 .SPX gained 2.43 points, or 0.06%, to 3,972.04 and the Nasdaq Composite .IXIC dropped 11.84 points, or 0.11%, to 10,919.83.

“The as expected headline and core CPI print have really contributed to the notion that the Fed will be downshifting again, whether it’s at February or at the March meeting remains to be seen, and we’re going to be watching the incoming Fed speak for any guidance throughout the day in that regard," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

"The fact that we have seen core inflation decelerate to 5.7% year-over-year, from 6% in November, reinforces the peak inflation argument."

The pan-European STOXX 600 index .STOXX rose 0.75% and MSCI's gauge of stocks across the globe .MIWD00000PUS gained 0.45% 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 6.8% according to CME's FedWatch Tool, down from 23.3% the day prior. The market is pricing in a 93.2% chance of a 25 basis point hike, up from 76.7% on Wednesday.

The benchmark U.S. 10-year notes US10YT=RR were down 3.9 basis points to 3.517%, from 3.556% late on Wednesday.

The dollar index hit its lowest level since early June before paring losses, and was last =USD down 0.417%, with the euro EUR= up 0.42% to $1.08.

The Japanese yen strengthened 2.01% versus the greenback at 129.85 per dollar, while Sterling GBP= was last trading at $1.2151, up 0.07% 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 CLc1 recently rose 1.11% to $78.27 per barrel and Brent LCOc1 was at $83.78, up 1.34% on the day.

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