Updates to afternoon U.S. trading

By Chuck Mikolajczak

Jan 17 (Reuters) - U.S. stocks rallied on Friday on optimism over the health of the economy and path of interest rates as investors braced for a slew of policy changes under the incoming Trump administration.

The S&P 500 and Dow Industrials were poised for their biggest weekly percentage gains since late November and the Nasdaq fared its best since early December. Data this week allayed fears that inflation would resurge while expectations have grown that the Federal Reserve will bump up the timing and magnitude of rate hikes this year.

The Commerce Department reported on Friday that U.S. single-family homebuilding rose to a 10-month high although demand will likely be curbed by rising mortgage rates and an oversupply of new properties.

A separate report revealed a surge in manufacturing output last month.

President-elect Donald Trump will be inaugurated on Monday, when U.S. markets will be closed for the Martin Luther King Jr. Day holiday.

Uncertainty over the potential for some of Trump's policies such as tariffs to rekindle rising inflation pressures and slow the path of Fed rate cuts has weighed on equities in recent weeks.

A solid start to the corporate earnings season with results from many big banks has also buoyed stocks, with the S&P 500 bank index .SPXBK up nearly 7% on the week.

"Stronger growth, feeding into better corporate earnings, you're kind of getting off to a start to the year here that there's plenty of questions both in terms of fiscal and monetary policy and what the Trump agenda will look like, or what shape it will take," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Southfield, Michigan.

"Despite all those questions, we're starting the year on a reasonably better footing than we've been on perhaps in the last few years."

The Dow Jones Industrial Average .DJI rose 397.40 points, or 0.92%, to 43,550.93, the S&P 500 .SPX climbed 68.27 points, or 1.15%, to 6,005.61 and the Nasdaq Composite .IXIC gained 319.95 points, or 1.65%, at 19,658.24.

The benchmark U.S. 10-year note yield US10YT=RR edged up 0.1 basis point to 4.607%, but has eased off a 14-month high of 4.809% hit earlier this week.

Cleveland Fed President Beth Hammack said inflation remains a problem, as recent data has pointed to a resilient economy. However, Fed Governor Christopher Waller indicated on Thursday the central bank could cut rates sooner and faster than expected as inflation is likely to continue to ease.

The Fed is widely expected to keep rates steady at its policy meeting later this month, with the markets pricing in a greater than 50% chance for a cut of at least 25 basis points until June, LSEG data showed.

Ten of the 11 S&P 500 sectors rose, led by a gain of more than 2% in consumer discretionary .SPLRCD stocks, while healthcare .SPXHC, down 0.26%, was the sole decliner.

Nvidia NVDA.O gained 3.2% and Broadcom AVGO.O rose 3.6% after Barclays raised its price targets on the stocks, helping to boost the PHLX semiconductor index .SOX by 2.8%.

In addition, Intel INTC.O surged 8.6% on speculation of a takeover and Qorvo QRVO.O shot up 13.5% after activist investor Starboard Value disclosed a 7.7% stake in the chipmaker.

Shares of social media firms such as Meta META.O had a muted reaction after the Supreme Court ruled against TikTok's challenge to a law that would force its app's sale or ban in the United States. Meta shares edged up 0.4% while Snap SNAP.N lost 2.5%.

Advancing issues outnumbered decliners by 2.32-to-1 on the NYSE and by 1.76-to-1 on the Nasdaq.

The S&P 500 posted 24 new 52-week highs and no new lows, while the Nasdaq Composite recorded 63 new highs and 61 new lows.

(Reporting by Chuck Mikolajczak; Aadditional reporting by Johann M Cherian and Sukriti Gupta in Bengaluru; Editing by Richard Chang)

((charles.mikolajczak@tr.com; @ChuckMik))