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Graphic: World FX rates (Updates prices) By Samuel Indyk LONDON, Feb 28 (Reuters) - Global equities were steady on Tuesday, while bonds wrapped up their worst performance for the month of February in decades, after more evidence of stubborn inflation added to expectations that central banks won't cut rates any time soon. The optimism that drove shares up and global bond yields down in January has ebbed this month, as data from around the world has pointed to economies and labour markets facing little in the way of strain from high inflation. The concern now is not so much over global recession, but over the prospect of there being little respite any time soon from higher interest rates. Earlier on Tuesday, data showed France's European Union-harmonised consumer prices rose to a record 7.2% in February, while Spain's EU-harmonised 12-month inflation was 6.1%, up from 5.9% in January and above the 5.5% expectation from analysts polled by Reuters. The pan-European STOXX 600 index was last flat on the day, but still on track for a 1.7% gain this month, its fourth positive month in five. MSCI's All-World index of global shares was last roughly steady on the day, but still close to Friday's seven-week low. The index is down around 3% this month, erasing some of January's 7.1% gain, when shares rose on expectations that major central banks were close to the end of their tightening cycle. Since then, a slew of U.S. and euro area economic data has reinforced the view that interest rates will rise further and stay high for longer. U.S. two-year Treasury yields , the most sensitive to shifts in expectations for interest rates, have risen by 60 basis points this month to almost 5%. This is their largest monthly rise for the month of February since 1981, according to Refinitiv data. "The Fed is expected to finish hiking rates at about 5.5% by October this year," said Matthias Scheiber, global head of portfolio management for the Systematic Edge team at Allspring. "That's quite a change from the beginning of the year when markets were pricing in a peak rate of 4.8%." Fed funds futures are fully pricing in a 25-bps rate rise from the Fed next month, with around a 20% chance of a larger 50-bps hike. It's not just U.S. markets that are reflecting a more sobering rate outlook. In Europe, two-year German bond yields are heading for their largest monthly rise for the month of February since 1991, while two-year UK gilts are heading for an increase of 25 bps, their biggest February rise since 2005. Euro-denominated money markets on Tuesday showed short-term rate forwards rose to 3.875%, implying an ECB deposit rate of 3.975% by year-end, from 3.775% on Thursday last week. Preliminary euro area wide consumer price inflation data for February is due on Thursday, while investors will get more information on the state of the U.S. economy with U.S. ISM manufacturing and services survey data for February due on Wednesday and Friday, respectively. "It's one thing for the Fed to hike and bring inflation down but what they don't want is a hard landing," Allspring's Scheiber said. "The ISM data released this week will give us a bit more of a clue on how the U.S. economy is dealing with higher interest rates so far," Scheiber added. The U.S. 10-year yield rose 3 bps to 3.9473%, having risen over 40 bps in February, its biggest monthly jump since September. Germany's 10-year yield , the benchmark for the euro area, was up 6 bps to 2.643%, its highest level since July 2011.
In the currency market, sterling was last trading at $1.2097, up another 0.3%, having jumped 1% on Monday after Britain struck a new trade deal with the European Union, brightening the outlook for the post-Brexit UK economy. The euro was up 0.1% to $1.0617, after rising 0.6% on Monday. The dollar index , which measures U.S. currency against six other peers, was flat at 104.64 and was set to snap a four-month losing streak, having risen 2.5% in February. U.S. crude rose 1.8% to $77.04 per barrel and Brent was at $83.64, up 1.4% on the day. Elsewhere, Chicago wheat futures were hovering near a 17-month low due to rain in parts of the U.S. winter wheat belt and optimism over a Russia-Ukraine export deal. Gold was at $1,810 an ounce having fallen around 6% in February. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Global FX performance German 10-year yield ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Samuel Indyk and Amanda Cooper in London and Ankur Banerjee in Singapore; Editing by Simon Cameron-Moore, Christina Fincher and Shounak Dasgupta)
