February 14, 2018 / 5:18 PM / 8 months ago

GLOBAL MARKETS-Bond prices drop, stocks rally after spike in U.S. CPI data

(Adds U.S. market open, byline, dateline; previous LONDON)

* Spotlight on Fed after U.S. inflation gains in January

* Dollar surrenders gains on inflation data

* Crude rebounds after U.S. inventory data, Saudi remarks

By Herbert Lash

NEW YORK, Feb 14 (Reuters) - U.S. debt prices fell on Wednesday after a spike in U.S. consumer prices in January raised expectations the Federal Reserve may quicken the pace of interest rate hikes, while global stocks rose as investors took a longer view of inflation.

The U.S. dollar surrendered gains against a basket of major world currencies after the Labor Department said its Consumer Price Index increased 0.5 percent. Gold rebounded from losses as stock markets swung higher and the dollar swooned.

Shares in Europe gained more than 1 percent while a gauge of global equity activity rose almost as much. Stocks on Wall Street opened lower but steadily climbed back after the initial shock of the big jump in monthly inflation was digested.

Joseph LaVorgna, chief economist for the Americas at French bank Natixis in New York, said inflation had to be put in context. The year-over-year rate on core inflation at 1.8 percent was still below the Fed’s target of 2 percent, he said.

Excluding the volatile food and energy components, the CPI shot up 0.3 percent in January.

Monthly data tend to be noisy, said Phil Orlando, chief equity strategist at Federated Investors in New York.

“The market is doing exactly what the market does, it shoots first and asks questions later,” Orlando said, adding investors are likely to remain jittery until the first Fed policy-setting meeting in March under new Chair Jerome Powell.

“There ought to be some chop to it as we’re trying to figure out what’s going on in the economy and how might the Fed adjust monetary policy under a new leadership team given the backdrop of macroeconomic data,” Orlando said.

MSCI’s all-country world index of stocks in 47 countries gained 0.77 percent while the pan-European FTSEurofirst 300 index of leading regional shares rose 1.13 percent to close at a preliminary 1,470.44.

The Dow Jones Industrial Average rose 16.22 points, or 0.07 percent, to 24,656.67. The S&P 500 gained 10.71 points, or 0.40 percent, to 2,673.65 and the Nasdaq Composite added 62.33 points, or 0.89 percent, to 7,075.84.

German government bond yields hit their highest in more than two years and European stocks fell briefly after release of the U.S. inflation data.

The yield on Germany’s 10-year government bond , the benchmark for the region, reversed earlier declines and rose around 3 basis points to 0.774 percent - its highest level since September 2015, according to Tradeweb data.

Benchmark U.S. 10-year notes last fell 17/32 in price to yield 2.9003 percent.

Oil prices rebounded from earlier losses after U.S. crude stocks rose less than expected and Saudi Energy Minister Khalid al-Falih said major producers would prefer tighter markets than to end supply cuts too early.

U.S. crude inventories rose 1.8 million barrels last week, Energy Information Administration (EIA) data showed compared with expectations for an increase of 2.8 million barrels.

U.S. crude rose 0.61 percent to $59.55 per barrel and Brent was last at $63.26, up 0.86 percent on the day.

Reporting by Herbert Lash; Editing by Bernadette Baum

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