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U.S. stocks rally as inflation data cements bets on rate hike pause

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By Noel Randewich and Shristi Achar A

(Reuters) – The S&P 500 and Nasdaq climbed to 14-month highs on Tuesday after data showed consumer prices rose modestly in May, boosting bets that the Federal Reserve will not raise interest rates at the end of its policy meeting on Wednesday.

Stocks rose after a U.S. Labor Department report showed the consumer price index (CPI) rose 0.1% last month after a 0.4% jump in April, with core inflation unchanged at 0.4%.

On a year-on-year basis, headline inflation increased by a less-than-estimated 4.0%, reflecting declines in the cost of energy products and services, including gasoline and electricity.

“If the Fed was looking for data to point to to say, ‘We’re going to pause in June,’ I think they got it today,” said Liz Young, head of investment strategy at SoFi in New York.

“But it’s another one of those that you can cut whichever way you want to make your case. If you want to be bullish, you say inflation is down more than 50% since its peak. If you want to bearish, you can say inflation is still more than twice the Fed’s target,” Young said.

Traders have priced in a 93% chance that the U.S. central bank will hold interest rates at the 5%-5.25% range on Wednesday, and 62% odds of 25-basis-point hike in July, according to the CME Fedwatch tool.

The benchmark S&P 500 has recovered 22% from its October 2022 closing low, fueled in large part by gains in market heavyweights such as Apple , Nvidia and Tesla . More recently, sectors such as energy and materials have climbed, as well as small-cap stocks.

All S&P 500 sector indexes rose on Tuesday, led by materials, up 2.2%, followed by a 1.32% gain in energy as commodities including oil and copper climbed against a falling dollar. [O/R] [MET/L]

The small-cap Russell 2000 index jumped 1.4% to a three-month high.

U.S.-listed shares of Chinese companies climbed after China’s central bank lowered its short-term lending rate for the first time in 10 months. Alibaba Group gained 2.16% and JD.com jumped 3.8%.

The S&P 500 was up 0.69% at 4,368.75 points.

The Nasdaq gained 0.70% to 13,556.75 points, while the Dow Jones Industrial Average was up 0.48% at 34,230.02 points.

Oracle rose 1% and was on track for its highest close ever after it provided an upbeat quarterly revenue and forecast.

Intel gained 1.7% after a report the chipmaker is in talks with SoftBank Group Corp’s Arm to be an anchor investor in its initial public offering.

Bunge Ltd added 2.2% after the U.S. grains merchant and Glencore-backed Viterra said they were merging to create an agricultural trading giant worth about $34 billion, including debt.

Advancing issues outnumbered falling ones within the S&P 500 by a 5.0-to-one ratio.

The S&P 500 posted 43 new highs and no new lows; the Nasdaq recorded 131 new highs and 39 new lows.

(Reporting by Shristi Achar A and Sruthi Shankar in Bengaluru, and by Noel Randewich in Oakland, California; Editing by Vinay Dwivedi and Richard Chang)

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