Markets on guard for US, China inflation risk

By Nell Mackenzie and Wayne Cole

LONDON/SYDNEY (Reuters) – World shares traded cautiously on Monday after a mixed U.S. jobs report triggered a rally in beaten-down bonds, but new hurdles lay ahead in the shape of U.S. and Chinese inflation figures due later this week.

MSCI’s broadest index of shares edged lower in thin trade, after losing 2.6% last week.

European shares opened largely flat, except for UK stock markets which opened lower, weighed down by heavyweight miners, while shares of Unite Group fell to the bottom of the index after a rating downgrade.

Chinese blue chips eased 0.9% with investors still disappointed at the lack of major and concrete stimulus steps from Beijing while the had risen 0.2% by 0822 GMT.

A summary of the last Bank of Japan meeting showed members felt making yield policy more flexible would help extend the life of its super-easy stimulus.

S&P index futures added 0.5%, while Nasdaq futures ticked up 0.6%.

With roughly 90% of earnings reported, results are 4% better than consensus estimates, with more than 79% of companies beating the Street, according to Refinitiv I/B/E/S data. Results due this week include Walt Disney (NYSE:) and News Corp (NASDAQ:).

Data on U.S. consumer prices are forecast to show headline inflation picking up slightly to an annual 3.3%, but the more important core rate is seen slowing to 4.7%.

“Markets are waiting to see this week’s CPI reports out of the US and China,” said Michael Hewson, chief market analyst at CMC Markets.

While bond markets might be driven this week by the U.S. bond issuance that has “played havoc” with yields, many economic data points show “significant disinflation is starting to take hold,” he said.

U.S. yields and rose by 3-4 bps after falling more than 10 bps on Friday.

Analysts argued this week that Treasury supply hitting the market could still pressure rates higher, as bond prices fall. Fitch downgraded the United States’ credit rating last week, and the Treasury Department announced an offering of $103 billion in Treasuries as it faced a growing deficit and the need to balance the overall profile of its debt issues.

Futures imply only a 12% chance of a Federal Reserve rate hike in September, and 24% for a rise by year-end.

Michael Gapen, an economist at BofA, warned that the market was still expecting too much policy easing next year given the recent run of resilient economic data.

“We now expect a soft landing for the U.S. economy, not the mild recession we had previously forecasted,” Gapen wrote.

“While the market implies between 120-160 bps of Fed cuts in 2024 we look for only 75 bps,” he added. “There’s simply less reason for the Fed to quickly pivot to rate cuts in 2024 when growth is positive and unemployment is low.”

As a result, the bank raised its year-end forecast for two-year and 10-year yields by 50 basis points to 4.75% and 4%, respectively.

The shift in yields gave a small boost to the U.S. dollar, which was 0.2% firmer against a basket of currencies at 102.29.

The euro eased 0.3% to $1.0976, having bounced from a trough of $1.0913 last week.

The strength in the dollar nudged gold down 0.4% to $1,935 an ounce.

Oil prices paused having rallied for six straight weeks amid tightening supplies. The 17% climb in combined with upward pressure on food prices from the war in Ukraine and global warming, is a threat to hopes for continued disinflation across the developed world.

Brent was off 35 cents at $85.87 a barrel, while also fell 41 cents to $82.41.