By Stephen Culp
NEW YORK (Reuters) - U.S. stocks jumped, the dollar tanked and Treasury yields tumbled on Thursday as cooler-than-expected inflation data suggested the Federal Reserve's barrage of interest rate hikes are beginning to have their intended effect.
All three major U.S. stock indexes notched their biggest one-day percentage advances in about 2-1/2 years in a broad, robust rally.
The risk-on fervor also sent the 10-year Treasury yield to its lowest level in five weeks and the safe-haven greenback plummeting.
"I'm surprised at the gain relative to the slight drop in inflation," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. "There must have been a lot of money sitting on the sidelines."
The consumer price index (CPI) showed the prices paid by urban U.S. consumers for a basket of items cooled down in October, a welcome indication that the buckets of cold water the Federal Reserve has been dumping on the economy with its hawkish monetary policy are reining in decades-high inflation at last.
(GRAPHIC-U.S. inflation gauges https://graphics.reuters.com/USA-STOCKS/xmvjkgzogpr/inflation.png)
"It shows you how focused asset owners were on inflation compared to everything else going on in the world," Tuz said. "Investors are getting into risk assets again across the board."
"It's a powerful sign that maybe what the Fed and central banks around the world are doing is going to work."
Following four consecutive 75 basis-point interest rate hikes from the Fed, financial markets have now priced in an 85% likelihood of a smaller, 50 basis-point interest rate hike at the conclusion of next month's FOMC policy meeting, and a 54% chance of an even smaller, 25 basis-point increase at the meeting to follow, according to CME's Fedwatch tool.
The Dow Jones Industrial Average rose 1,201.43 points, or 3.7%, to 33,715.37, the S&P 500 gained 207.8 points, or 5.54%, to 3,956.37 and the Nasdaq Composite added 760.97 points, or 7.35%, to 11,114.15.
European shares shot up to their highest close in 11 weeks.
The pan-European STOXX 600 index rose 2.75% and MSCI's gauge of stocks across the globe gained 4.57%.
Emerging market stocks lost 0.49%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.21% higher, while Japan's Nikkei lost 0.98%.
Signs that the decades-high inflation growth is beginning to ebb sent U.S. Treasury yields to a five-week low, supporting expectations that the Fed could ease its foot from the rate-hike accelerator.
Benchmark 10-year notes last rose 85/32 in price to yield 3.82%, from 4.142% late on Wednesday.
The 30-year bond last rose 125/32 in price to yield 4.0519%, from 4.319% late on Wednesday.
The dollar tumbled against a basket of world currencies as the prospect of post-peak inflation lured investors away from the safety of the greenback.
The dollar index fell 2.41%, with the euro up 2.07% to $1.0218.
The dollar's slide corresponded with spikes in the yen and other exchange rates.
The Japanese yen strengthened 4.26% versus the greenback at 140.51 per dollar, while sterling was last trading at $1.1729, up 3.28% on the day.
Robust investor risk appetite helped cryptocurrencies stage a partial comeback, with bitcoin last up about 13%, reversing its freefall after the collapse of crypto exchange FTX.
Crude prices bounced back following the CPI surprise, on hopes that sturdy demand will help offset renewed COVID-19 restrictions in China.
U.S. crude rose 0.75% to settle at $86.47 per barrel, while Brent settled at $93.67 per barrel, up 1.1% on the day.
Gold prices jumped as the dollar dropped. Spot gold added 3.0% to $1,756.78 an ounce.
(Reporting by Stephen Culp in New York; Editing by Rosalba O'Brien and Lisa Shumaker)