LONDON, Feb 14 (Reuters) - Global stocks pared losses and stabilised on Wednesday, while the dollar and Treasury yields held near their recent highs, after traders pared back expectations for the pace and scale of rate cuts by the Federal Reserve this year.
The latest shift in rate expectations came after an upside surprise in U.S. inflation on Tuesday that showed the consumer price index (CPI) rose 3.1% on an annual basis, above forecasts for a 2.9% increase.
The data has prompted traders to slash their bets on where U.S. rates will go this year.
Futures now point to about 90 basis points worth of cuts from the Fed by December, roughly four quarter-point drops, compared to 110 bps prior to the data release and 160 bps at the end of 2023.
With the prospect of a steep drop in interest rates ebbing, investors kept the pressure on global stocks, which had rallied strongly towards the end of last year on aggressive bets for rate cuts by major central banks globally in 2024.
The MSCI All-World index (.MIWD00000PUS), opens new tab, which hit two-year highs on Monday, was flat on the day, following a drop on Wall Street overnight that pulled the S&P 500 (.SPX), opens new tab back below 5,000 points. U.S. futures , were up 0.4-0.6%.
Worryingly for investors, the CPI report showed an unexpected pickup in stickier elements, such as service-sector inflation and shelter, helped drive the overall increase.
"When you get a jump like this, and the year-on-year figures really show this rather than the monthly ones, that’s a shock because it just shows that it's not all plain sailing and we may get more increases in inflation," Trade Nation senior market analyst David Morrison said.
"We should be surprised by the jump in inflation, because I don’t think anyone was thinking about that. It was more how slowly do we get down towards 2%, and this is like kicking the ladder away a bit," he said.
In Europe, the STOXX (.STOXX), opens new tab edged up 0.5% as a flurry of stronger earnings boosted the regional index.
Even Japan's Nikkei (.N225), opens new tab, which hit its highest in 34 years on Tuesday, was not spared from the beating and fell 0.7%.
The recent rally in the Nikkei has been greased by a sliding yen , which weakened past the key 150 per dollar level for the first time this year on Tuesday.
The yen last stood at 150.60 per dollar. The 150 level has been seen in the past as a potential catalyst for intervention by Japanese monetary authorities. It was just past this level that they intervened to shore up the yen in late 2022.
"If they do try intervention, I think it'll be near... the (dollar/yen) high from October 2022 and the high we saw in mid-November," said Tony Sycamore, a market analyst at IG.
Japan's top currency officials warned on Wednesday against what they described as rapid and speculative yen moves overnight.
HIGHER FOR LONGER
Yields on 10-year U.S. Treasuries struck their highest in more than two months following Tuesday's inflation report, which gave the dollar a burst of strength.
By Wednesday, the benchmark 10-year yield was down 1 bp at 4.305%, below a session peak of 4.332%.
With yields holding firm, the dollar clawed into positive territory against a basket of currencies to 104.89 , having hit its highest since November on Tuesday.
"The attendant, broad-based U.S. dollar surge admittedly reflects (the) corresponding surge in U.S. Treasury yields," said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank.
Sterling fell 0.3% to $1.2554, after UK data showed inflation did not pick up as expected last month.
In cryptocurrencies, bitcoin rose 4.2% and is beyond the $50,000 level, bringing its total market capitalisation above $1 trillion for the first time since November 2021.
Oil prices rose, building on Tuesday's gains, as geopolitical tensions lingered in the Middle East and eastern Europe.
U.S. crude traded up 0.1% at $77.91, while Brent futures were up 0.1% at $82.88.
Gold meanwhile fell 0.1% to $1,990 an ounce.
Additional reporting by Rae Wee in Singapore; Editing by Himani Sarkar, Keith Weir and Jan Harvey
