Stocks and bond yields fall as inflation fears grow

Stocks and bond yields fall as inflation fears grow

People pass an electronic screen displaying Japan’s Nikkei stock price index inside a conference hall in Tokyo, Japan, June 14, 2022. REUTERS/Issei Kato

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  • European shares down 0.6%, S&P 500 futures down 0.8%
  • Dollar above 137 yen ahead of US CPI, inflation expectations
  • Banks start earnings season from Thursday
  • Oil prices drop in volatile trading

LONDON (Reuters) – Stocks and bond yields fell on Monday as investors braced for a US inflation report that could force another big hike in interest rates as policymakers around the world battle inflation while wary of the threat of a recession.

European stock STOXX fell 0.6% (.STOXX), with S&P 500 futures down 0.56% and Nasdaq futures down 0.7% as the upbeat US jobs report for June raised expectations for a 75 basis point Federal Reserve hike.

The euro was hovering above parity against the dollar, as the largest single pipeline carrying Russian gas to Germany entered annual maintenance, with flows expected to stop for 10 days. Read more

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Eurozone bond yields fell while long-term inflation expectations fell below 2% as recession fears deepened after warnings of a possible cut in Russian gas supplies. Read more

The yield on German 10-year government bonds, the benchmark for the euro zone, fell 5 basis points to 1.296%. It hit a 5-week low of 1.072% last week.

To underscore the global nature of the inflation challenge, the central banks of Canada and New Zealand are expected to tighten policy further this week.

While Wall Street made some gains last week, the market mood will be tested by the earnings of JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo on the following day.

Another hurdle will be the US consumer price report on Wednesday, as markets see core inflation accelerating to 8.8% but a slight deceleration in the core metric to 5.8%.

An early reading of consumer inflation expectations this week will also get the Fed’s close attention.

“The unexpected weakness in these releases will be required to offset expectations of a 75 basis point Fed rate hike on July 27, which rose from about 71 basis points to 74 basis points after the jobs report,” said Ray Atrell, head of FX strategy at NAB.

MSCI’s broadest index of Asia Pacific shares outside Japan (.MIAPJ0000PUS) fell 1.8%, while China’s blue-chip index (.CSI300) lost 1.9% after Shanghai detected a COVID-19 case that includes a new variable, Omicron BA.5.2.1. Read more

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A hawkish Fed, combined with recession fears, particularly in Europe, has kept the dollar up at 20-year highs against a basket of competitors. The dollar broke above 137.00 to reach its highest level since 1998 at 137.28 yen as the Bank of Japan remained dovish. Read more

Japan’s conservative coalition government was expected to increase its majority in upper house elections on Sunday, two days after the assassination of former Prime Minister Shinzo Abe. Read more

The euro continued to struggle at $1.0122, after losing 2.4% last week, hitting a two-decade low and a major rebound target at $1.0072.

said Jonas Goltermann, a senior market economist at Capital Economics.

“In fact, we believe that the EUR/USD price will break through parity before long, and it may somehow trade through that level.”

Higher interest rates and a strong dollar have been a nuisance to non-yielding gold, which has been tumbling at $1,739 an ounce, after falling for four consecutive weeks.

Oil prices also lost about 4% last week as concerns about demand offset supply constraints.

Data coming out of China on Friday is likely to confirm that the world’s second-largest economy contracted sharply in the second quarter amid coronavirus lockdowns.

Brent traded as low as $2 at $104.94, while US crude fell $2.45 to $102.35 a barrel.

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(Reporting by Lawrence White and Wayne Cole) Editing by Kenneth Maxwell, Bradley Perrett, Kirsten Donovan and Mark Heinrich

Our Standards: Thomson Reuters Trust Principles.

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