U.S. stocks rallied even as August inflation held well above the Federal Reserve's target, while longer-dated Treasury yields retreated from multiyear highs as confidence grows in the central bank's resolve to rein in price pressures.

Investors hardened their bets on a Fed rate hike next week after the U.S. inflation rate held steady at 3.4% in August. While the headline figure was in line with forecasts, core inflation--which excludes volatile food and energy--rose above market expectations.

Markets now price an 82.5% likelihood of a quarter-point hike, according to LSEG. That reading was below 70% Thursday.

"A Fed hike now appears to be a done deal," said Anthony Willis, senior economist at Columbia Threadneedle.

Longer-dated U.S. government bond yields pulled back from multiyear highs following the inflation print as investors grew more confident the Fed would act to fight inflation. Yields on 10-year Treasurys traded around 4.920% after nearing the 5% threshold earlier in the session. Yields on 30-year bonds slipped, but held near highs not seen since 2004, as the Treasury's expanded buyback program struggled to support the long end. On the short end of the yield curve, two-year yields--a proxy for near-term Fed rates--climbed further to 4.600%.

Oil prices pulled back after closing above $107 a barrel Thursday, after the International Energy Agency further cut its forecast for oil demand. Prices remained elevated as investors brace for the indefinite closure of the Strait of Hormuz. Increasing activity by Iran-backed Houthi rebels in Yemen adds another threat to energy infrastructure in the region. Brent crude oil was last 3.35% lower at $104.02.

Stocks typically fall as rate-hike bets strengthen. But U.S. stocks were in the green after the inflation print, putting major indexes on track to break a four-day losing streak. Helped by the fall in oil prices, the Dow Jones Industrial Average added 1.1%, while the S&P 500 rose 1% in early trade. The Nasdaq gained 0.9%.

Lower long-term borrowing costs likely buoyed equity market sentiment. A rising conviction that the Fed will raise rates to tame inflation is also supporting stocks.

"The Fed can either choose a rate hike next week and a controlled rise in short term US borrowing costs, or do nothing and risk an uncontrolled rise in long-term US borrowing costs," said David Rees, head of global economics at asset manager Schroders.

Oracle shares pared premarket gains, but still traded up around 2% after the software and cloud-computing company posted a 60% surge in profits for its fiscal first quarter.

Elsewhere, Asian stocks endured a sharp fall following losses during Thursday's U.S. session. Japan's Nikkei dropped 1.9%, while Korea's chip maker-dominated Kospi lost 1.8%. Hong Kong's Hang Seng fell 0.65%.

European stocks broadly strengthened, after wiping out two months of gains in rocky trade so far this week. The Europe-wide Stoxx 600 rose 0.7%, driven by banks and industrials.

The dollar gained, while sterling strengthened slightly after stronger-than-expected U.K. economic growth data. Bitcoin rose 1.9% to $77,960.15,while New York gold futures nudged back above $4,400 a troy ounce.