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Shares, bonds brace for high U.S. inflation, hawkish Fed

Asian shares slip as rising U.S. yields hit tech firms
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Screens displaying stock index prices and the exchange rate of the Japanese yen against the US dollar are seen after a New Year celebration marking the opening of trading in 2022 at the Tokyo Stock Exchange (TSE), amid the coronavirus (COVID-19) pandemic, in Tokyo, Japan, January 4, 2022. Reuters / Issa Kato

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  • Asian stock markets:
  • China stocks are flat, S&P futures are flat
  • Bond yields remain high ahead of US CPI report
  • Core inflation is on the rise again, boosting the Fed’s rally

SYDNEY (Reuters) – Major stock markets calmed on Monday as investors counted down another reading of US inflation that should seal an early interest rate hike from the Federal Reserve, raise bond yields and penalize tech stocks.

The explosion in coronavirus cases globally also threatens to disrupt consumer spending and growth, just as the Federal Reserve is considering turning off its liquidity spigots, a tough time for markets addicted to endless cheap money.

This led to cautious trading with S&P 500 futures down 0.1% and Nasdaq futures up 0.1%. EUROSTOXX 50 futures and FTSE futures are up 0.2%.

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MSCI’s broadest index of Asia Pacific shares outside Japan (.MIAPJ0000PUS) added 0.2%, while South Korea’s (.KS11) lost 1.0%.

China’s blue-chip stocks (.CSI300) were little changed as the recent easing policy was offset by persistent concerns about the real estate sector. Read more

Analysts fear that Wednesday’s US consumer price report will show core inflation rising to a multi-decade high of 5.4% and lead to a rate hike as soon as March.

While the December payroll numbers did not forecast expectations, the drop in the unemployment rate to just 3.9% and the strength in wages suggest that the economy was suffering from a labor shortage.

“This was consistent with the Fed’s evolving view that the labor market is nearing maximum employment or is already operating as wage pressures increase,” said analysts at NatWest Markets.

“This should add to speculation about a rally in March, and we have withdrawn our expectations for a Fed hike in March instead of June.”

A group of Federal Reserve officials will come out to present their latest thoughts this week, including President Jerome Powell and Governor Lyle Brainard who face confirmation hearings.

The markets quickly turned to reflect the risks with futures indicating a greater than 70% chance of a rally to 0.25% in March and at least two more times by the end of the year.

Technology and growth stocks fell as investors turned to banks and energy companies, while bonds took a beating.

US 10-year Treasury yields were close to highs last seen in early 2020 at 1.765%, after jumping 25 basis points last week in their biggest move since late 2019. Next chart target is 1.95/1.97 %. we

“We believe the increase in long-term Treasury yields should continue,” said Nicholas Farr, an economist at Capital Economics.

“Markets may still be underestimating how high the fed funds rate will be in the next few years, so our expectation is that the 10-year yield will rise by another 50 basis points, to 2.25%, by the end of 2023.”

The Fed’s hawkish shift tends to benefit the US dollar, although it was hit with profit taking on Friday after the jobs report failed to meet high market expectations.

The dollar index settled at 95.764, after falling 0.5% on Friday, but it has support at 95.568.

The euro rebounded to $1.1354, leaving it near the top of the recent trading range of $1.1184/1.1382. The Japanese yen took a breather from its recent bearish run to stand at 115.64, as the dollar faded from last week’s high of 116.34.

In the commodity markets, gold was firmer at $1,795 an ounce but short of its January high of $1,831.

Oil prices have stabilised, after surging 5% last week, helped in part by supply disruptions due to unrest in Kazakhstan and blackouts in Libya.

Brent crude rose seven cents to $81.82 a barrel, while US crude settled unchanged at $78.90.

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Edited by Shree Navaratnam

Our Standards: Thomson Reuters Trust Principles.

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