Stocks rise, dollar stumbles after U.S. inflation data

© Reuters. Passersby are silhouetted as they walk past in front of an electric stock quotation board outside a brokerage in Tokyo, Japan October 18, 2022 REUTERS/Issei Kato

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 fed expectations the Federal Reserve may have leeway to scale back the size of future interest rate hikes.

U.S consumer prices fell in December for the first time in more than 2-1/2 years as prices fell 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 signal of slowing inflation.

On Wall Street, equities were choppy after the data, with the S&P 500 falling as much as 0.8% and then rebounding. Friday will bring results from a number of big U.S. banks, kicking off the fourth-quarter earnings season for S&P 500 companies.

The Dow Jones Industrial Average rose 216.96 points, or 0.64%, to 34,189.97, the S&P 500 gained 13.56 points, or 0.34%, to 3,983.17 and the Nasdaq Composite added 69.43 points, or 0.64%, to 11,001.11.

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 0.80% to notch 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 3.8% according to CME's FedWatch Tool, down from 23.3% the day prior. The market is pricing in a 96.2% chance of a 25 basis point hike, up from 76.7% on Wednesday.

The benchmark U.S. 10-year notes were down 12.9 basis points to 3.427%, 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 at 102.07 before slightly paring losses, and was last down 0.873%, with the euro up 0.89% to $1.0851.

The Japanese yen strengthened 2.56% versus the greenback at 129.18 per dollar, while Sterling was last trading at $1.2215, up 0.60% 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 settled up 1.27% at $$78.39 per barrel and Brent settled at $$84.03, up 1.65% on the day.