Stocks advance, bond yields fall with hopes for weaker U.S. inflation

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By Sinéad Carew and Huw Jones

NEW YORK/LONDON (Reuters) - Wall Street equities were rising while Treasury yields were falling and the dollar was flat on Wednesday as investors bet that upcoming U.S. inflation data would give the Federal Reserve the go-ahead to slow the pace of its interest rate hikes.

Longer-dated treasury yields fell a day before the release of December's U.S. consumer price index (CPI) data as the market bet that inflation is on a sustainable downward path that could lead the Federal Reserve to at least slow its rate hikes.

Meanwhile, the dollar was barely higher and gold was virtually unchanged after earlier scaling an eight-month peak.

Crude oil prices shrugged off early losses to rally 3% as hopes for an improved global economic outlook and concern over the impact of sanctions on Russian crude output outweighed a massive surprise build in U.S. crude stocks.

Earlier, copper rose above $9,000 a tonne for the first time since June on hopes for demand improvements in China, which has removed COVID-19 restrictions. These moves along with hopes for dampening inflation set a positive tone for stocks.

"This week is bundled up in some good inflation expectations data for Thursday," said Nela Richardson, chief economist at ADP.

"The Goldilocks report we got for December with strong employment growth and moderating wage growth was the best case scenario for the market. They're waiting for confirmation on Thursday that CPI is moderating. If they get that the rally will continue this week and on into next week."

December's CPI is expected to show annual inflation at 6.5%, down from 7.1% in November with the data viewed as a crucial signpost for investors looking to figure out the Fed's next steps in its rate hiking cycle.

But with a labor market that is incredibly tight and "not participating in the Fed's plan," Richardson says investors seem to "over-prioritze data that suggests the Fed will pivot."

"The market seems to think that a moderation in inflation necessarily leads to a Fed pivot but I don't. I think the Fed keeps hiking rates and that they stay at higher levels for some time," she said.

Current expectations are for a 25 basis points rate increase at the February meeting after a 50 basis point hike in December.

"The first step would be a downshift in the pace of hiking and the next would be a pause," said Cliff Hodge, chief investment officer at Cornerstone Wealth.

The Dow Jones Industrial Average rose 199.59 points, or 0.59%, to 33,903.69, the S&P 500 gained 36.63 points, or 0.93%, to 3,955.88 and the Nasdaq Composite added 132.21 points, or 1.23%, to 10,874.84.

The pan-European STOXX 600 index rose 0.38% and MSCI's gauge of stocks across the globe gained 0.83%. Emerging market stocks rose 0.28%.

In treasuries, benchmark 10-year notes were down 6.1 basis points to 3.558%, from 3.619% late on Tuesday.

The 30-year bond was last down 7.2 basis points to yield 3.6823%, from 3.754%. The 2-year note was last was down 3 basis points to yield 4.2283%, from 4.258%.

In currencies, the dollar index, which measures the greenback against a basket of major currencies, fell 0.058%, with the euro up 0.24% to $1.076.

The Japanese yen weakened 0.12% versus the greenback at 132.42 per dollar, while Sterling was last trading at $1.2154, down 0.01% on the day.

In commodities oil prices rose as hopes for an improved global economic outlook and concern over the impact of sanctions on Russian crude output outweighed a higher-than-expected build in U.S. crude and fuel stocks. [O/R]

U.S. crude settled up 3.05% at $77.41 per barrel and Brent settled at $82.67, up 3.21% on the day.

In precious metals, spot gold dropped 0.1% to $1,876.40 an ounce. U.S. gold futures gained 0.20% to $1,874.60 an ounce.