* European stocks down 0.6%, S&P 500 futures down 0.8%
* Dollar rises above 137 yen ahead of US CPI and inflation expectations
* Banks kick off earnings season from Thursday
* Oil prices slide in volatile trading
By Lawrence White
LONDON, July 11 (Reuters) – Stocks and bond yields fell on Monday as investors braced for a U.S. inflation report that could force another massive hike in interest rates, as policymakers around the world are battling inflation while wary of the threat of a recession.
The STOXX index of European stocks fell 0.6%, S&P 500 futures fell 0.56% and Nasdaq futures fell 0.7%, as an upbeat report on the US payrolls in June raised expectations of a 75 basis point hike from the Federal Reserve.
The euro hovered just above parity against the dollar as the biggest pipeline carrying Russian gas to Germany went into annual maintenance, with flows set to stop for 10 days.
Eurozone bond yields fell as long-term inflation expectations dipped below 2% as recession fears deepened after warnings of a possible cut in Russian gas supplies.
The yield on Germany’s 10-year government bond, the benchmark for the euro zone, fell 5 basis points to 1.296%. It hit a 5-week low at 1.072% last week.
Underscoring the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten policy further this week.
While Wall Street made some gains last week, market sentiment will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the next day.
Another hurdle will be Wednesday’s US consumer price report, in which markets see headline inflation accelerating to 8.8% but a slight slowdown in the baseline measure to 5.8% .
A first reading on consumer inflation expectations this week will also hold the Fed’s attention.
“Unexpected weakness in these releases will be needed to dislodge expectations of a 75 basis point Fed rate hike on July 27, which fell from around 71 basis points to 74 basis points after the report on payroll,” said Ray Attrill, head of FX strategy at NAB.
MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 1.8%, while Chinese blue chips lost 1.9% after Shanghai discovered a case of COVID-19 involving a new sub -variant, Omicron BA.5.2.1.
A hawkish Fed, combined with fears of recession, particularly in Europe, kept the dollar at 20-year highs against a basket of competitors. The dollar broke above 137.00 to hit its highest since 1998 at 137.28 yen as the Bank of Japan remained dovish.
Japan’s conservative coalition government is expected to have increased its majority in upper house elections on Sunday, two days after the assassination of former Prime Minister Shinzo Abe.
The euro continued to struggle at $1.0122, after losing 2.4% last week to hit a two-decade low and a major retracement target at $1.0072.
“With little economic relief on the horizon for Europe and US inflation data likely to mark a new high for the year and keep the Fed aggressively higher, we believe risks remain biased in favor greenback,” said Jonas Goltermann, a senior market economist at Capital Economics.
“Indeed, we believe that the EUR/USD rate will cross parity soon, and could well trade down to this level.”
Rising interest rates and a strong dollar were a headache for non-performing gold, which was hurting at $1,739 an ounce after falling for four straight weeks.
Oil prices also fell around 4% last week as demand concerns offset supply constraints.
Data from China due Friday is expected to confirm that the world’s second-largest economy contracted sharply in the second quarter amid a coronavirus lockdown.
Brent was trading $2 at $104.94, while U.S. crude slid $2.45 to $102.35 a barrel.
(Reporting by Lawrence White and Wayne Cole; Editing by Kenneth Maxwell, Bradley Perrett, Kirsten Donovan and Mark Heinrich)