Stocks and bonds are tense as the week of rate hikes approaches

LONDON (Reuters) – Stock markets around the world halted their January rally on Monday, pausing to catch a breath at the start of a week of central bank rate hikes and the release of data that will show whether progress has been made in the fight against the central bank. inflation.

Investors expect the Federal Reserve to raise interest rates by 25 basis points on Wednesday, followed the next day by a half-point hike in interest rates from the Bank of England and the European Central Bank, and any deviation from this scenario would be a real shock.

Europe’s benchmark STOXX fell 0.8% Monday morning, echoing a slight decline in MSCI’s broadest index of Asia-Pacific shares outside Japan. (.MIAPJ0000PUS)which is up 11% in January so far as China’s reopening boosted sentiment.

Likewise, the US Nasdaq is on track for its best January performance since 2001, a rally that will be tested by earnings updates from the tech giants this week.

US stocks were set to follow Monday’s tense mood, with S&P 500 futures down 1% and Nasdaq futures down 1.3%, as investors await guidance later in the week on Fed policy.

Analysts expect a hawkish tone that indicates more must be done to tame inflation. Read more

“With US labor markets continuing to tighten, core inflation rising, and financial conditions easing, Fed Chair Powell’s tone will be hawkish,” said Bruce Kasman, chief economist at JPMorgan, stressing that a shift to a 25 basis point increase does not mean that There is a pause coming.” , which expects another rise in March.

“We also look forward to him continuing to resist market pricing in interest rate cuts later this year,” he added.

There is a lot of pressure to do given that futures currently expect rates to peak at 5% in March and drop to 4.5% by the end of the year.

Europe provided a quick reminder that the battle against rising prices is far from over, as bond yields in the region rose sharply on Monday in the wake of stronger-than-expected Spanish inflation data.

The data showed that inflation rose 5.8% year-on-year in January, versus expectations of 4.7%, pushing the region’s benchmark German 10-year government bond yield 7 basis points to 2.3190%, the highest level since January 10.

Italian and Spanish revenues also increased slightly.

The dollar index was flat ahead of this week’s key data, on track for a fourth consecutive monthly loss of more than 1.5% as expectations mount that the Federal Reserve is nearing the end of its rate-raising cycle.

The core of Apple

10-year yields are down 33 basis points so far this month to 3.50%, mainly due to accommodative financial conditions even as the Fed’s hawkish talks on tightening.

This pessimistic view will also be tested by US payroll data, Employment Cost Index and several Institute of Production Management surveys.

A reading on EU inflation could be important as to whether the ECB signals a half-point rate hike for March, or opens the door to a slowdown in the pace of tightening. Read more

As for the recent rally on Wall Street, a lot will depend on Apple’s earnings (AAPL.O)Amazon.com (AMZN.O)Alphabet Inc (GOOGL.O) and meta platforms (META.O)among many others.

“Apple will provide a glimpse into the overall consumer demand story globally, and a snapshot of supply chain issues in China will slowly begin to ease,” analysts at Wedbush wrote.

They added, “Based on our recent examinations of the supply chain in Asia, we believe demand for iPhone 14 Pro is holding up more strongly than expected.” “Apple will probably cut some costs, but we don’t expect mass layoffs.”

Market pricing of early federal easing has weighed on the dollar, which has lost 1.6% so far this month to stand at 101.85 against a basket of major currencies.

The euro rose 1.5% for the month of January at $1.0878, close to a nine-month high. The dollar lost 1.3% against the yen to 129.27 despite the Bank of Japan’s dogged defense of its ultra-easy policies.

The dollar’s decline and yields have been a boon for gold, which is up 5.8% for the month so far at $1,930 an ounce.

The precious metal was flat on Monday ahead of a series of major central bank moves and data releases.

China’s rapid reopening is seen as a windfall for commodities in general, supporting everything from copper to iron ore to oil prices.

Oil stabilized on Monday after previous losses, with prices rising due to escalating tensions in the Middle East over a drone attack in Iran and hopes for an increase in Chinese demand.

Brent crude rose 10 cents, or 0.12%, to $86.76 a barrel by 1200 GMT, while US West Texas Intermediate crude rose 4 cents, or 0.05%, to $79.72.

Reporting on Lawrence White and Wayne Cole; Editing by Christopher Cushing, Aaron Kuyor, and Christina Fincher

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