Shares hold up, yields drop before U.S. inflation data

By Danilo Masoni

MILAN (Reuters) - World shares rose on Wednesday and bond yields slipped further below recent peaks ahead of inflation data in the United States that will offer a guide to how aggressively the Federal Reserve will raise rates.

European equities extended their bounce from two-month lows and U.S. futures also gained before the release of the keenly awaited datapoint which analysts say could show inflationary pressures in the world's biggest economy are peaking.

MSCI's benchmark for global stocks rose 0.3% by 1044 GMT after sliding on Tuesday to its lowest level since November 2020 on fears Fed tightening could significantly slow down the global economy. The index is down 17% so far this year.

The pan-European STOXX 600 equity benchmark index rose 1.3%. U.S. equity futures rose, with the Nasdaq and S&P 500 e-minis up 1.5% and 1.2% respectively.

Concerns over faltering growth, exacerbated by the latest virus lockdowns in China, curbed a selloff in government bonds that saw 10-year U.S. benchmark yields surge past 3% this month for the first time since December 2018.

"It's an unanchored market where people don't know where (yields) are going to. The growth side is coming more and more to the fore in terms of market concerns," said Charles Diebel, head of fixed income at Mediolanum International Funds.

"If inflation continues to print higher and higher the market will continue to sell off. Intuitively inflation cannot keep going up as base effects will unwind at some point but are we are that price yet?" he added.

Analysts expect the U.S. consumer price index to show an 8.1% annual increase, 0.4 percentage points lower than the prior 8.5%, which was the hottest reading since 1981.

They also predict a sharp pullback in monthly growth, cooling to 0.2% in April from 1.2% in March.

In Asia, equities squeezed higher from near two-year lows. Chinese blue chips rose 1.4% after Shanghai officials saying half the city had achieved "zero COVID" status, and after U.S. President Joe Biden saying he was considering eliminating Trump era tariffs on China.

Chinese data released on Wednesday, however, showed consumer prices gained 2.1% from a year earlier, above expectations and the fastest pace in five months, partly due to food prices.

YIELDS FALL

Benchmark 10-year Treasury yields fell to their lowest levels in almost a week, extending their fall from the three-year high of 3.203% hit on Monday, on bets the CPI data could show surging inflation finally starting to peak.

The 10-year yield fell to as low as 2.9270%, down 5 basis points (bps) on the day, while the 2-year yield, which often reflects the Fed rate outlook, fell 1.8 bps to 2.5858%.

Euro area government bond yields also fell to their lowest levels in almost a week on signs that any tightening in European Central Bank monetary policy will be gradual. German 10-year yields fell 4 bps to 0.964%.

Bets over aggressive Fed tightening has also supported the dollar this year.

The dollar index, which measures the greenback against six main peers, fell 0.4% to 103.57, below the two-decade high of 104.19 reached at the start of the week.

The Fed last week raised interest rates by 50 basis points and Chair Jerome Powell said two more such hikes are likely at the U.S. central bank's coming policy meetings.

There has also been speculation in markets the Fed will need to go in for a massive 75 basis point hike at one meeting and currently Money markets are pricing over 190 basis points of combined rate hikes by year.

"The current problem is that the market is convinced that the Fed is determined to fight inflation and therefore willing to tolerate market volatility and some demand destruction more than in the past. Personally, I'm less convinced of this determination," said Giuseppe Sersale, fund manager at Anthilia.

Morgan Stanley (NYSE:MS) forecasts this year's global economic growth to be less than half of 2021 at 2.9%, down from a previous estimate of 3.2%. The U.S. bank also cut its year-end target for the S&P 500 by 11% to 3,900 points, while raising its U.S. 10-year yield forecast by 55 bps to 3.15%.

Oil bounced back, buoyed by supply concerns as the European Union works on gaining support for a ban on Russian oil. [O/R]

Brent rose 2.9% to $105.40 a barrel and U.S. crude rose 3% to $102.79.

Spot gold rose 0.8% to $1,852.65 an ounce.