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Stocks climb and U.S. yields fall after inflation data

By Chuck Mikolajczak

NEW YORK (Reuters) - A gauge of global stocks was on course for its biggest weekly percentage gain in 4-1/2 months on Friday, with the two-year U.S. Treasury yield set for its first quarterly decline in the past nine, as U.S. inflation data fueled hopes the Federal Reserve may be reaching the end of its rate hiking cycle.

U.S. consumer spending rose moderately in February, and while inflation cooled, it remained elevated enough to possibly allow the Federal Reserve to raise interest rates one more time this year.

(Graphic: Fed's preferred inflation gauge eases - https://www.reuters.com/graphics/PCE-INFLATION/zdpxdqzbmpx/chart_eikon.jpg)

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Additional data showed U.S. consumer sentiment fell for the first time in four months in February on concerns of an impending recession, although the impact of the recent banking crisis was muted.

Expectations for a 25 basis point rate hike at its May meeting dipped to about 50%, with no hike seen to be just as likely.

However, Boston Federal Reserve President Susan Collins said the inflation data doesn't alter the Fed's monetary policy path yet, while New York Fed President John Williams said financial conditions will be a key contributor to his thinking about what’s next for central bank interest rate policy.

"Fed fund futures are basically pricing in a coin flip of a 25 (basis point) hike in May, but calling that the end of it, if they even go there, so anytime the data doesn’t give the Fed a reason to re-engage hawkishly, the market is going to like it," said Ross Mayfield, investment strategist at Baird in Louisville, Kentucky.

"It’s not like it was a soft print but it was below consensus on pretty much every metric and the core data is creeping closer to where the Fed wants it."

On Wall Street, U.S. stocks rose, with the S&P 500 set to notch its second straight quarterly advance as it closed at its highest level since February 15, after advancing for three straight weeks to close out the month.

The Nasdaq Composite, up 16.8% in the first quarter, snapped a streak of four straight quarterly declines.

On the session, the Dow Jones Industrial Average .DJI rose 415.12 points, or 1.26%, to 33,274.15, the S&P 500 .SPX gained 58.48 points, or 1.44%, to 4,109.31 and the Nasdaq Composite .IXIC added 208.44 points, or 1.74%, to 12,221.91.

European shares were also higher, after a reading of inflation in the euro zone dropped by the most on record in March, although the core price growth, which excludes food and energy, accelerated.

The pan-European STOXX 600 index .STOXX closed up 0.66% and MSCI's gauge of stocks across the globe .MIWD00000PUS gained 1.04%, on track for its biggest weekly gain since mid-November.

Even with a slight decline for the month, the STOXX index notched a second straight quarterly gain. MSCI's index was poised for a fifth straight session of gains, its longest streak in two months, and recorded gains in back-to-back quarters.

Expectations the Fed may be nearing the end of its rate hiking cycle have helped send U.S. Treasury yields lower recently. The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 4.7 basis points at 4.052% on the day, after touching a low of 4.023%.

The two-year yield is set to decline for the first time in nine quarters after a drop of about 75 basis points in March, the biggest monthly drop since January 2008 during the financial crisis then.

Benchmark 10-year notes US10YT=RR were down 7 basis points to 3.481%, from 3.551% late on Thursday. The 10-year yield is down more than 40 basis points for the month.

The dollar pared some gains against the euro in the wake of the U.S inflation data, as investors see the Fed pausing its rate hiking cycle before the European Central Bank.

The dollar index =USD rose 0.342%, with the euro EUR= down 0.53% to $1.0843. The dollar index is on pace for its second straight quarterly decline.

The Japanese yen weakened 0.08% versus the greenback at 132.74 per dollar, while Sterling GBP= was last trading at $1.2331, down 0.42% on the day.

Oil prices were higher on the session to record their second straight weekly advance.

U.S. crude CLc1 recently settled up 1.75% at $75.67 per barrel and Brent LCOc1 settled at $79.77, up 0.63% on the day.

(Reporting by Chuck Mikolajczak, Editing by Angus MacSwan, Jonathan Oatis and Deepa Babington)