Yields, stocks dip ahead of US inflation data

NEW YORK: US bond yields and world equity markets dipped on Tuesday, ahead of a widely anticipated U.S. inflation report later this week that may provide some indication of the pace of future interest rate hikes by the Federal Reserve.

Major stock indexes in the U.S. and Europe inched lower and a gauge of global equity performance fell modestly, with gains in Asian heavyweights Tencent, Samsung, Alibaba and Taiwan Semiconductor offsetting some downward pressure.

Economists expect the U.S. consumer price index to have risen month over month by 0.3 percent in January with a core reading of 0.2 percent when the Labor Department report is released on Wednesday, according to a Reuters poll.

The CPI data is one of the most eagerly awaited macroeconomic reports in recent memory, said Mike Terwilliger, portfolio manager of Resource Liquid Alternatives for the Resource Credit Income Fund.

"After years of pronouncing inflation 'dead,' the market is now suddenly focused on and dreading inflation, which of course was at the cornerstone of this most recent period of market volatility," he said.

The prospect of heightening inflation and a U.S. budget that contemplates even greater deficit spending could lead to a radical repricing of all fixed-income assets, he said.

Gennadiy Goldberg, interest rates strategist at TD Securities in New York, said the U.S. government debt market was a little on edge ahead of the report.

"It's unwilling to put in strong positions ahead of that report. People want to see if it would confirm the recent trend of strong inflation and strong growth," Goldberg said.

A faster pace of inflation is likely to fan fears that the Fed would increase the number of rate hikes this year - the same worries that sparked the market rout that began Feb. 2 after a jobs report showed the strongest annual wage growth since 2009.

"I expect a continued stream of volatility, driven by  uncertainty among investors with fears of accelerating rates. I don't think that's going away any time soon," said Andre Bakhos, managing director at New Vines Capital LLC in Bernardsville, New Jersey.

MSCI's gauge of stock markets in 47 countries  was down just 0.03 percent and its emerging markets index rose 1.00 percent.

In Europe, the pan-regional FTSEurofirst 300 index closed down a provisional 0.56 percent and stocks on Wall Street trended lower.

The Dow Jones Industrial Average fell 118.7 points, or 0.48 percent, to 24,482.57. The S&P 500 lost 8.9 points, or 0.34 percent, to 2,647.1 and the Nasdaq Composite  dropped 13.40 points, or 0.19 percent, to 6,968.56.

Cleveland Fed President Loretta Mester, a voting member in the central bank's rate-setting committee this year, said inflation should pick up this year but not at a rate that requires a faster Fed reaction.

The market sell-off this month that led to stocks to decline 10 percent from a record peak last month and a jump in volatility will not damage the U.S. economy's overall strong prospects, Mester told the chamber of commerce in Dayton, Ohio.

U.S. long-dated Treasury yields slipped in generally quiet trading.

Benchmark 10-year notes last rose 2/32 in price to yield 2.8494 percent.

German government bonds were in demand as recent multi-year highs on yields on either side of the Atlantic proved attractive for some investors.

Germany's 10-year bund, the benchmark for the euro bloc, was down 1.5 basis points at 0.74 percent, off 2-1/2 year highs of 0.81 percent hit last week.

The Japanese yen rose to a five-month high on the back of broad-based selling of the dollar.

The dollar index fell 0.61 percent, with the euro  up 0.56 percent to $1.236. The Japanese yen strengthened 0.97 percent versus the greenback at 107.62 per dollar.

Oil fell to its lowest in two months, giving up early gains after a forecasting agency estimated world crude supply could overtake demand this year, potentially undermining producer efforts to curb supply.

The Paris-based International Energy Agency raised its forecast for oil demand growth in 2018 to 1.4 million barrels per day, from a previous projection of 1.3 million bpd.

U.S. crude fell 23 cents to $59.06 per barrel and Brent was down 11 cents at $62.48.