US STOCKS-Wall Street edges higher after inflation report; small caps outperform

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Updated at 9:55 a.m. ET/1355 GMT

By Johann M Cherian and Purvi Agarwal

Sept 27 (Reuters) - U.S. main stock indexes inched up on Friday and small-cap stocks outperformed after a benign inflation report cleared the way for the Federal Reserve to focus on shoring up the labor market while continuing its interest rate easing.

A Commerce Department's report showed that consumer spending increased moderately in August, suggesting the economy retained some of its solid momentum in the third quarter, while inflation pressures continued to abate.

"It's a relief to have (inflation) move in the right direction and hopefully it continues going in that direction," said Joe Saluzzi, co-head of equity trading at Themis Trading.

"It really doesn't matter whether it's 50 bps or 25 bps. What matters is, will they continue cutting rates over the next year?"

Odds that the central bank will cut rates by 50 basis points at its November meeting stood at about 52.1%, compared with 50% seen before the data. Those for a 25 bps reduction stand at about 47.9%, as per the CME Group's FedWatch Tool.

Inflation moderating towards the central bank's 2% target gave the Fed enough room to commence its policy easing cycle with a 50 basis point rate cut last week. Focus will now shift to a slew of labor market reports due next week.

At 9:55 a.m. ET, the Dow Jones Industrial Average .DJI rose 141.53 points, or 0.34%, to 42,316.64, the S&P 500 .SPX gained 4.87 points, or 0.08%, to 5,750.24 and the Nasdaq Composite .IXIC gained 12.22 points, or 0.07%, to 18,202.51.

The Russell 2000 index .RUT, which tracks small caps, outperformed with a 0.7% rise.

Nine out of the 11 S&P 500 sectors were higher, led by a 1.1% rise in energy stocks .SPNY.

Tech stocks such as Nvidia NVDA.O and Amazon.com AMZN.O lost 0.9% and 0.4%, respectively, and weighed on the Nasdaq.

The University of Michigan's final September estimate on consumer sentiment stood at 70.1, compared with estimates of 69.3, as per economists polled by Reuters.

Remarks from Fed Governor Michelle Bowman later in the day will remain in focus.

Late on Thursday, Fed Governor Lisa Cook said the central bank's rare move earlier this month could address increased "downside risks" to employment.

Wall Street's main indexes ended higher in the previous session, with the S&P 500 .SPX closing at its highest level on record. The three major indexes are on track for their third straight week of gains.

Among other stocks, Bristol-Myers Squibb BMY.N surged 2.3% after the U.S. FDA approved its schizophrenia drug.

Costco Wholesale COST.O dropped 2.8% after posting downbeat fourth-quarter revenue.

U.S.-listed shares of Chinese firms such as Alibaba BABA.N rose 3.5%, PDD Holdings PDD.O climbed 5.8% and NetEase NTES.O gained 2.8% after China's central bank lowered interest rates and injected liquidity into the banking system, in its latest stimulus move.

Miners such as Arcadium TM.N> added 4.2% and U.S.-listed shares of BHP BHP.N rose 1 .5% after a report showed top Chinese cities Shanghai and Shenzhen are planning to lift key remaining restrictions on home purchases to attract potential buyers.

Advancing issues outnumbered decliners by a 2.88-to-1 ratio on the NYSE and by a 2.28-to-1 ratio on the Nasdaq.

The S&P 500 posted 25 new 52-week highs and no new lows, while the Nasdaq Composite recorded 37 new highs and 23 new lows.

(Reporting by Johann M Cherian and Purvi Agarwal in Bengaluru; Editing by Anil D'Silva and Maju Samuel)

((johann.mcherian@thomsonreuters.com;))