February 14, 2018 / 8:33 PM / a year ago

GLOBAL MARKETS-Bonds drop but stocks rally after spike in U.S. CPI

(Adds oil, gold settlement prices, close of European markets)

* 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) - Treasury 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.

The report increased the likelihood that the Fed will raise rates in March when policy-makers meet even as U.S. retail sales posted their largest decline in 11 months.

The odds of a March rate hike rose 7 percentage points to 83.1 percent, according to the CME Group’s FedWatch tool.

Shares in Europe gained more than 1 percent as did a gauge of global equity activity. Stocks on Wall Street opened lower but steadily climbed through the session 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 1.28 percent while the pan-European FTSEurofirst 300 index of leading regional shares rose 1.03 percent to close at 1,469.00.

Shares in Europe rose after initial declines as solid corporate results and economic data kept investors confident.

Data earlier in the day showed Germany’s economy was set to power ahead in 2018, while a Thomson Reuters study said fourth-quarter European earnings growth expectations were revised upwards after 15 weeks of downgrades.

The Dow Jones Industrial Average rose 205.55 points, or 0.83 percent, to 24,846. The S&P 500 gained 31.46 points, or 1.18 percent, to 2,694.4 and the Nasdaq Composite added 117.72 points, or 1.68 percent, to 7,131.23.

German government bond yields hit their highest in more than two years. 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.

Yields on the benchmark 10-year U.S. Treasury note hit a fresh four-year high. The notes last fell 19/32 in price to yield 2.9095 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 $1.41 to settle at $60.60 per barrel and Brent settled up $1.64 at $64.36 per barrel.

U.S. gold futures for April delivery settled up $27.60 per ounce at $1,358.

Reporting by Herbert Lash; Editing by Bernadette Baum and Nick Zieminski

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