By Koh Gui Qing

NEW YORK (Reuters) – World stocks bounced on Wednesday while U.S. Treasury yields dipped after the latest U.S. inflation data showed price pressures are surging but still within expectations, reinforcing bets the Federal Reserve will soon be raising interest rates.

Data showed the U.S. consumer price index surging a whopping 7% in the 12 months through December, the biggest annual increase since June 1982, but in line with forecasts.

Investors appeared to be comforted by the fact that inflation was not worse than feared, and that the Federal Reserve was unlikely to be more aggressive than expected in hiking interest rates and tightening monetary policy.

“Today’s inflation report continued to reinforce the theme that gaudy price gains are not standing in the way of demand,” said Rick Rieder, BlackRock (NYSE:)’s Chief Investment Officer of Global Fixed Income and Head of the BlackRock Global Allocation Investment Team.

“We don’t think the Fed will overreact to this condition,” Rieder said, adding that he expected the Fed to likely raise rates in March.

By early afternoon, the benchmark gained 0.23%, the added 0.36%, and the inched up 0.05%.

European and Asian shares were more ebullient, with the pan-European index rising 0.66%. 100 climbed 0.81% to one-year highs, lifted by mining and oil giants. ()

had risen 1.9% overnight, while MSCI’s broadest index of Asia-Pacific shares outside Japan closed up 1.95%.

Buoyant global equity markets lifted MSCI’s gauge of stocks across the globe up by 0.87%.

That the U.S. inflation data was largely within forecasts weighed on Treasury yields, as investors bet that policy would not be tightened more than expected.

Benchmark 10-year Treasury yields edged down to 1.7269%, pulling back more than seven basis points from an almost two-year high hit on Monday. [US/]

Though Fed fund futures are predicting nearly four rate hikes this year, a seismic change from a few months ago, longer-term rate expectations haven’t budged sharply.

U.S. interest rate pricing is peaking at 1.5% by the third quarter of 2024, far lower than previous U.S. rate tightening cycles.

“It seems to be a fait accompli that the Fed will hike interest rates quickly, even if inflation comes in a little below expectations,” Commerzbank (DE:) analysts said in a client note.

“In a worst-case scenario, lift-off will not be in March, but in May or June.”

The dollar hit a new two-year low on the inflation report, with the falling 0.666% to 94.986. A struggling dollar lifted the euro up 0.5% to a near two-month high of $1.14405, and boosted by 0.2% to $1,825.97 an ounce.

The prospect of rate hikes by the Bank of England also boosted sterling. The pound leapt 0.54% to $1.37055, its highest in more than two months against the dollar.

Still, in a sign that inflationary pressure could persist even as central banks tighten policy, oil prices hit two-month highs on Wednesday, lifted by tight supply and easing concerns over the spread of the Omicron coronavirus variant.

rose 1.96% to $82.81 per barrel and was at $84.85, up 1.35% on the day. [O/R]

“Omicron is yesterday’s story now,” said Luca Paolini, chief strategist at Pictet Asset Management. “The market isn’t moving on Omicron but on earnings, Fed and economic data.” (Graphic: US CPI expected to hit 7%, https://fingfx.thomsonreuters.com/gfx/mkt/zjpqknabypx/USCPI1201.PNG)

Not all major central banks are tightening policy though. In China, a softer than expected reading on prices has drawn bets on policy easing.

Five-year Chinese government bond futures rose eight ticks to an 18-month high before trimming gains. gains were also capped. [CNY/]