LONDON, Sept 11 (Reuters) - A selloff in global equity markets paused on Friday as oil prices retreated from a four-month high, but accelerating U.S. consumer inflation prompted traders to add to expectations for a rate hike from the Federal Reserve next week, keeping bond yields elevated.
The Consumer Price Index increased 0.4% last month after edging up 0.1% in July, the Labor Department's Bureau of Labor Statistics said.
"Today’s inflation data have done nothing to change our view that the Fed is behind the curve," said David Rees, head of global economics at Schroders.
"While headline inflation is being pushed around by rising energy prices, the bigger picture is that the economy is running hot and domestically generated inflation is grinding higher."
Traders were quick to add to bets for a rate hike from the Fed at its two-day meeting next week. Markets now see about an 85% chance of a quarter-point hike, compared with around 67% prior to the data.
HIGHER FOR LONGER
Brent crude hit a four-month high of $109.97 a barrel on Friday after a 6% jump the day before, but it soon ran into selling pressure and was last down about 3% at $104.28. It was still set for a weekly rise of over 8%.
Oil flows remained restricted through the Strait of Hormuz as the U.S. and Iran traded attacks, although prices have fallen after the Financial Times reported that foreign ministers in the Middle East were trying to work out a temporary deal to manage shipping through the waterway.
But markets are still pricing in the risk of a protracted war. Comments from President Donald Trump that the conflict could last beyond the November midterm elections haven't helped, with bond yields surging globally on heightened inflation fears.
"Markets are pricing in a scenario of higher rates for longer," said Gustav Helgesson, macro strategist at SEB.
The benchmark 10-year Treasury yield was little changed on Friday at 4.95%, helped by retreating oil prices. It briefly touched its highest in almost three years at 4.9915% immediately after the inflation data.
The 30-year yield scaled another 19-year top of 5.424% before falling back to 5.341%. Bond yields move inversely with prices.
The shorter end came under more strain after the data with the 2-year yield rising 4.5 bps to 4.6593% after surging 12 bps on Thursday.
In Europe, the 10-year German Bund yield was up 1 bp for the day and up 17 bps for the week, its biggest weekly rise since March.
TIGHTER POLICY
Analysts at JPMorgan now expect eight of the nine developed-market central banks to hike interest rates by the year end, including the Fed, BOJ, all four central banks in Europe, and the reserve banks of Australia and New Zealand.
"The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures," they said in a note.
The European Central Bank raised interest rates on Thursday for the second time this year and some officials see more tightening ahead with October in play.
RELIEF FOR EQUITIES
U.S. equity futures held gains after the data, taking comfort from a dip in oil and gas prices, although major bourses were still set for sharp weekly falls. Nasdaq and S&P 500 futures both rose about 0.7%.
The pan-European STOXX 600 (.STOXX), was up 0.7% on Friday but down 1.5% this week.
Asian stocks finished with sharp losses. MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), lost 1.5% while Japan's Nikkei (.N225), tumbled 1.9%.
The U.S. dollar rose with higher Treasury yields, having gained 0.4% on Thursday against its major peers. It was steady on Friday at 99.11.
Gold rose 1.1% to $4,361 an ounce after dropping nearly 2% on Thursday.
Reporting by Samuel Indyk and Stella Qiu; Editing by Stephen Coates, Elaine Hardcastle and Chizu Nomiyama
