Stocks Climb, Dollar Eases As Fed Hike View Dialed Back

A gauge of global stocks rose on Monday and the dollar eased as investors dialed back expectations the Federal Reserve will take a more aggressive approach in hiking interest rates next week while the U.S. corporate earnings season picks up steam.

Stocks on Wall Street were higher in the early portion of trading, buoyed in part by bank stocks, up 1.0% as Goldman Sachs climbed 3.5% and Bank of America advanced 1.1% after their quarterly results.

Expectations for a 100 basis points rate hike by the Fed at its policy meeting next week stood at about 31%, according to CME's FedWatch Tool after reaching as high as 80% last week.

Recent readings on inflation came in above expectations but showed signs that higher prices may be starting to ease, giving the U.S. central bank a possible cushion to raise interest rates at a smaller 75 basis points increment.

"I know we just had two bad headline numbers, but the evidence on inflation is becoming more and more pronounced that it is rolling over, the commodity upward inflationary thrust, the leading edge of commodities, has turned into a deflationary trust," said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.

"What the market is starting to sniff out is that yeah, the Fed is going to put its funds rate into the same ZIP code that the free market rates are at -- that is two and a half-ish percent -- but once it is there, it might be done for a while."

The Dow Jones Industrial Average rose 174.44 points, or 0.56%, to 31,462.7; the S&P 500 gained 23.56 points, or 0.61%, to 3,886.72; and the Nasdaq Composite added 98.21 points, or 0.86%, to 11,550.63.

The pan-European STOXX 600 index rose 0.83% and MSCI's gauge of stocks across the globe gained 1.11%.

Benchmark 10-year U.S. Treasury notes last fell 17/32 in price to yield 2.993%, from 2.93% late on Friday.

Prior to the Fed meeting next week, the European Central Bank is poised to raise rates for the first time in more than a decade on Thursday, with a hike of 25 basis points expected, while Italy grapples with a political crisis after Prime Minister Mario Draghi tendered his resignation last week, a move that was rejected by the country's president.

Draghi is expected to address parliament on Wednesday, but Italy's 10-year bond yield rose as high as 3.49%, to push the closely watched spread over German Bund yields to its widest level in over a month at about 235 bps.

As the region deals with its own inflationary pressures, Russia's Gazprom has declared force majeure on gas supplies to Europe to at least one major customer, according to a letter from Gazprom that will add to European fears of fuel shortages.

In light of the changing view of next week's Fed meeting, the U.S. dollar retreated from the 20-year high hit last week, helping the euro move away from parity against the greenback.

The dollar index fell 0.881%, with the euro up 1.08% to $1.0196.

The Japanese yen strengthened 0.37% versus the greenback at 138.04 per dollar, while Sterling was last trading at $1.2029, up 1.49% on the day.

Oil prices extended gains, boosted by mounting concerns over gas supply from Russia and a lower dollar, offsetting demand fears brought on by a possible recession and China lockdowns.

U.S. crude recently rose 4.09% to $101.58 per barrel and Brent was at $105.53, up 4.32% on the day.