European shares fall ahead of US rate hike, inflation data

SYDNEY LONDON shares fell on Monday at the start of an agenda-setting week for markets in which interest rate hikes in Europe and the United States, as well as US jobs and wage data will give markets a fresh update on the battle against inflation.

The Federal Reserve's rate will be raised by 25 basis points on Wednesday after half-point hikes from the Bank of England and the European Central Bank, and any deviation from that script would be a real shock, according to investors.

Earnings from tech giants will test the mettle of Wall Street bulls, who are hoping to propel the Nasdaq to its best January since 2001.

Europe's benchmark STOXX index fell by 0.5 percent on Monday morning, a slight dip in MSCI's broadest index of Asia-Pacific shares outside Japan, which has surged 11 percent in January.

The US stock market was in a panic as investors were waiting for guidance on the Federal Reserve'sFederal Reserve's policy later in the week, as the S&P 500 futures and Nasdaq futures fell nearly 1 percent.

Analysts expect a hawkish tone, suggesting that more needs to be done to tame inflation.

With US labor markets still tight, core inflation elevated and financial conditions easing, Fed Chair Powell's tone will be hawkish, stressing that a downshifting to a 25 bp hike doesn't mean a pause in March, said Bruce Kasman, chief economist at JPMorgan.

We look for him to push back against market pricing of rate cuts later this year. Futures already expect rates to peak at 5 percent in March, but fall back to 4.5 percent by the end of the year.

The dollar index was flat ahead of the data, which is on course for a fourth consecutive monthly loss of more than 1.5 percent on growing expectations that the Fed is nearing the end of its rate-hike cycle.

Yields on 10 year notes have fallen 33 basis points this month to 3.50 percent, mainly due to easing financial conditions, even as the Fed talks are tough on tightening.

The data on US payrolls, the employment cost index, and various ISM surveys will give a dovish outlook.

Reading on EU inflation could be important for whether the ECB signals a half-point rate rise for March or opens the door to a slowdown in the pace of tightening.

Earnings from Apple Inc, Amazon.com, Alphabet Inc, and Meta Platforms, among many others, will be important for Wall Street's recent rally.

According to analysts, Wedbush, iPhone 14 Pro demand is holding up firmer than expected based on our recent Asia supply chain checks.

They say that Apple will probably cut some costs around the edges, but they do not expect mass layoffs.

Market pricing of early Fed easing has been a burden on the dollar, which has lost 1.6 percent so far this month to stand at 101.790 against a basket of major currencies.

In January, the euro was up 1.5 percent at $1.0878 and just off a nine-month top. Despite the Bank of Japan's dogged defence of its ultra-easy policies, the dollar has lost 1.3 percent on the yen to 129.27.

The drop in the dollar and yields has been a boon for gold, which is up 5.8 percent for the month so far, at $1,930 an ounce.

The precious metal was flat on Monday ahead of the slew of key central bank moves and data releases.

The oil market was hesitant despite concerns that the Fed rate hikes could choke fuel demand, with Brent down nearly 1 percent $85.88 a barrel, while US crude fell 87 cents to $78.8.