Wall St turns bullish ahead of inflation data, Fed action

By Lawrence Delevingne

(Reuters) -Wall Street stocks, oil prices and U.S. Treasury yields all rose on Monday as investors took an optimistic stance ahead of the last round of transatlantic central bank interest rate hikes this year, hoping that the now-hefty pace of increases in borrowing costs will finally slow.

The Dow Jones Industrial Average was up nearly 1.6%, the S&P 500 gained 1.4%, and the Nasdaq Composite rose about 1.25%. Boosting the indexes was a nearly 3% rise in shares of Microsoft Corp (NASDAQ:MSFT), following the software maker's plans to buy a stake in the London Stock Exchange Group (LON:LSEG).

After a multi-week decline, oil prices also jumped as a key crude pipeline supplying the U.S. closed and Russia threatened a production cut, even as China's loosening COVID-19 restrictions bolstered the fuel demand outlook. [O/R]

The dollar was virtually flat in thin trading as investors awaited in the release of U.S. consumer price index (CPI) data for November on Tuesday, when a slowdown in core annual inflation is anticipated.

The MSCI all country stock index gained 0.55%, still down nearly 18% so far this year, wiping out all gains from 2021.

In Europe, the STOXX index of 600 companies was down about 0.5% as investors awaited interest rate moves.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slid 1.3%, erasing some of the previous week's gains stemming from optimism that China is finally opening up its economy with the dismantling of its zero-COVID policy. Japan's Nikkei eased 0.2%.

CENTRAL BANK WATCH

Economists expect the Fed on Wednesday, and the European Central Bank and Bank of England on Thursday, to all raise rates by 50 basis points - slowing down from the 75 basis point hikes seen in recent meetings.

Patrick Spencer, vice chair of equities at Baird investment bank, said central banks will start taking a less aggressive stance this week, though Tuesday's CPI data will be critical.

"It's the last important week of the year, after this week you've got no real sort of catalysts. If the CPI is a muted number, we're off to the races and we'll get our year-end rally," Spencer said.

But irrespective of the CPI, deflationary pressures are increasing, with crude oil prices down for the year, and iron ore, lumber and house prices also down, Spencer said.

"All this talk of recession, I think it is certainly in the price, it's in the markets. The key about recession is generally employment, and I think employment is going to be stronger than people give it credit," Spencer said.

While the Fed is widely expected to raise rates by 50 basis points on Wednesday at its last meeting of 2022, the focus will also be on the central bank's updated economic projections and Fed Chair Jerome Powell's press conference.

"This week's focus is likely to be centered on CPI and the Fed. To us, that is yesterday's news," Morgan Stanley (NYSE:MS) market strategists wrote in a note on Monday.

"While it's important for ... year-end trading ranges, the final chapter to this bear market is all about the path of earnings estimates, which are far too high, in our view."

DOLLAR MUTED, YIELDS EDGE UP

U.S. Treasury yields rose slightly on Monday ahead of the Fed's next move. The yield on 10-year Treasury notes was up 4.4 basis points at 3.613% and the yield on 30-year bonds was up 2.9 basis points at 3.579%. Two-year yields, which typically move in step with interest rate expectations, rose 5.8 basis points to 4.388%.

In currency markets, the dollar index was slightly lower at $105.01, not far from the five-month trough of $104.1 hit a week ago. The euro was also flat at $1.0535.

Brent crude futures settled 2.5% higher at $77.99 a barrel, and U.S. crude finished at $73.17 a barrel, 3% higher on the day.

Gold prices slipped as investors stayed on the sidelines awaiting news later in the week. Spot gold dropped 0.9% to $1,780.56 an ounce. U.S. gold futures fell 1.10% to $1,778.30 an ounce.