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Shares and bonds chastened as Fed, ECB urge care

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A passerby walks past an electric monitor displaying the graph of recent movements on Japanese yen exchange rate against the U.S. dollar in Tokyo, Japan, October 20, 2022. REUTERS/Issei Kato/File Photo

Shares steadied and bond yields remained close to multi-year highs on Monday after U.S. and European central bankers encouraged caution as they battle to curb inflation via rate hikes, without throttling growth.

U.S. Federal Reserve Governor Christopher Waller on Sunday warned investors against getting carried away over a single data point showing signs of success in the battle against inflation, saying it would take a string of soft reports for the bank to take its foot off the brakes.

A modest miss on U.S. inflation had seen two-year Treasury yields dive 33 basis points for the week and the dollar lose almost 4% – the fourth biggest weekly decline since the era of free-floating exchange rates began over 50 years ago.

Waller added the markets were well ahead of themselves on just one inflation print, though he did concede the Fed could now start thinking about hiking at a slower pace.

Two-year yields edged down to 4.39%, after diving as far as 4.29% on Friday.

Meanwhile dovish comments from European Central Bank policymaker Fabio Panetta saw European bond yields ease, but short-dated rates remained within striking distance of multi-year highs.

Panetta said the ECB needs to avoid overtightening as that could destroy productive capacity and deepen a recession.

Germany’s 2-year government bond yield , more sensitive than other maturities to policy rate changes, was down 4 basis points (bps) at 2.09% after hitting its highest since December 2008 at 2.252% last week.

“The CPI downside surprise aligns with a broad range of indicators pointing to a downshift in global inflation that should encourage a moderation in the pace of monetary policy tightening at the Fed and elsewhere,” said Bruce Kasman, head of economic research at JPMorgan.

“This positive message needs be tempered by the recognition that downshift in inflation will be too little for central banks to declare mission-accomplished, and more tightening is likely on the way.”

The benchmark European STOXX index rose 0.26% (.STOXX), and MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) added 0.6%, after jumping 7.7% last week.

U.S. stock futures looked set to open lower as investors took the hint not to get ahead of any anticipated slowdown in rate hikes, with S&P e-mini futures down 0.35% and Dow e-minis down 82 points or 0.24% , .

Chinese stocks gained on reports that regulators have asked financial institutions to extend more support to stressed property developers.

China’s real estate index (.CSI000952) jumped 3.5% in response. Blue chips (.CSI300) rose 0.2%, helped by a slew of changes to China’s COVID curbs, even as the country reported more cases over the weekend. read more

“It’s hard to see how the case news is anything but negative from an economic standpoint, but it’s the symbolism of the movement, however small, in the zero COVID strategy that markets are happily latching onto,” said Ray Attrill, head of FX strategy at NAB.

U.S. President Joe Biden met Chinese leader Xi Jinping in person on Monday for the first time since taking office on the Indonesian island of Bali ahead of a Group of 20 (G20) summit, with both stressing the need for a better dialogue between their nations.

Bilateral relations are at their lowest level in decades amid disagreements over Taiwan, Russia’s war in Ukraine and North Korea’s nuclear ambitions.

Last week’s collapse of crypto exchange FTX and the resulting plunge in cryptocurrencies seems so far not to have tainted other asset classes, as regulators pick through the wreckage and investors in the digital assets look on nervously.

Bitcoin recovered 4% to $16,993 , having shed almost 22% last week, while FTX’s native token, FTT , inched up 3% to $1.46, leaving its month-to-date losses at still over 90%.

The dollar steadied amid fading expectations of a less aggressive Federal Reserve interest rate hike following Governor Waller’s weekend intervention.

The dollar index was last seen on Monday at 106.86, still well short of last week’s 111.280 top , while the euro eased a touch to $1.032 , after climbing 3.9% last week.

Sterling eased back to $1.1782 ahead of the British finance minister’s Autumn Statement on Thursday, where he is expected to set out tax rises and spending cuts.

The firming dollar also dragged down oil prices, despite the hopes of a demand boost from China’s hints at reopening.

Brent crude futures were down 74 cents, or 0.75%, to $95.42 a barrel by 1326 GMT after settling up 1.1% on Friday.

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