Shares, bonds brace for high US inflation, hawkish Fed

Highlights:

* S&P futures up 0.1%, European futures shade firmer

* Bond yields stay high ahead of US CPI report

* Core inflation seen rising again, cementing Fed hike

Major share markets made cautious gains on Monday as investors counted down to another US inflation reading that could well set the seal on an early rate hike from the Federal Reserve, lifting bond yields yet further.

The explosion in coronavirus cases globally also threatens to crimp consumer spending and growth just as the Fed is considering turning off the liquidity spigots, tough timing for markets addicted to endless cheap money.

That made for wary trading with S&P 500 futures adding 0.1% and Nasdaq futures 0.2%. EUROSTOXX 50 futures and FTSE futures both edged up 0.2%.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.3%, while South Korea lost 1.0%.

Chinese blue chips were a fraction firmer as recent policy easing was balanced by lingering concerns over the property sector.

Analysts fear the US consumer price report on Wednesday will show core inflation climbing to its highest in decades at 5.4% and usher in a rate rise as soon as March.

While the December payrolls number did miss forecasts, the drop in the jobless rate to just 3.9% and strength in wages suggested the economy was running short of workers.

"It was consistent with the Fed's evolving view that the labour market is getting close to or is already at maximum employment with wage pressures building," said analysts at NatWest Markets.

"This should add to speculation about a March hike, and we have pulled our expectation for the Fed's lift-off to occur in March instead of June."

A raft of Fed officials will be out to offer their latest thinking this week, including Chair Jerome Powell and Governor Lael Brainard who face confirmation hearings.

Markets quickly shifted to reflect the risks with futures implying a greater than 70% chance of a rise to 0.25% in March and at least two more hikes by year end.

Technology and growth stocks tumbled as investors switched to banks and energy firms, while bonds took a beating.

Yields on 10-year US Treasury notes were near highs last seen in early 2020 at 1.765%, having shot up 25 basis points last week in their biggest move since late 2019. The next chart target is the 1.95/1.97% area.

"We think that the increase in long-dated Treasury yields has further to run," said Nicholas Farr, an economist at Capital Economics.

"Markets may still be underestimating how far the federal funds rate will rise in the next few years, so our forecast is for the 10-year yield to rise by around another 50bp, to 2.25%, by the end of 2023."

The Fed's hawkish shift has tended to benefit the US dollar, though it ran into profit taking on Friday after the payrolls report failed to meet the market's lofty expectations.

The dollar index edged up to 95.900, after falling 0.5% on Friday only to find support at 95.700.

The euro stood at $1.1336, leaving it near the top of the recent $1.1184/1.1382 trading range. The Japanese yen got a brief break from its recent bear run to stand at 115.74, as the dollar faded from last week's 116.34 peak.

In commodity markets, gold was a shade weaker at $1,792 an ounce and well short of its January top of $1,831. Oil prices held firm, having climbed 5% last week helped in part by supply disruptions from the unrest in Kazakhstan and outages in Libya.

Brent added 11 cents to $81.86 a barrel, while US crude gained 10 cents to $79.00.