Marketmind: Irksome inflation won't die down

A look at the day ahead in U.S. and global markets from Mike Dolan

As investors mull what looks like a new year re-acceleration of the world economy, the narrative of steady disinflation has been ripped up and interest rate markets are still scrambling to re-price.

Friday's latest U.S. inflation surprise was matched in Europe on Tuesday, with French and Spanish headline inflation rates unexpectedly rising again in February - making for an uncomfortable final day of a transformative month for markets.

The dramatic rethink of the macro and inflation picture since early February has seen implied peak policy rates for both the Federal Reserve and European Central Bank climb half a percentage since the start of the month - to 5.4% and 3.9% respectively.

That's some move from the current 4.50-4.75% and 2.5% levels. Just as important, any thought of rate cuts this year has evaporated.

And worryingly, market-based measures of inflation expectations are rising sharply again too.

U.S. two-year 'breakeven' inflation rates, taken from inflation-protected Treasury securities, have jumped 80 basis points this month to 2.8% - wiping away the prior assumption that inflation would return to the Fed's 2% target over two years.

While 10-year 'breakevens' have been a bit steadier at just under 2.5%, the Fed target remains elusive. In Europe, the five year, five-year forward inflation linked swap has jumped 20bps to a 9-month high just under 2.5%.

The message from central bankers is rates both have further to rise and are not coming down quickly.

ECB chief economist Philip Lane told Reuters on Tuesday that euro zone inflation pressures were showing some signs of easing but there would be no end to rate hikes until the ECB was more confident of hitting its target.

Asked how long rates could stay in a territory that restricts economic growth, Lane said: "It could be quite a long-lasting period, a fair number of quarters."

Stock markets steadied after early losses, with U.S. futures only slightly in the red ahead of the open and month end.

The dollar was mixed too, rising against the yen but falling back against the yuan and sterling. The pound continued its advance on this week's breakthrough in Brexit talks between Britain and the European Union.

Geopolitical tensions simmered in the background as Russian troops attempted to encircle the eastern Ukraine city of Bakhmut and investors fretted about China possibly providing Moscow with military support - a move U.S. government officials have said would come at a cost to Beijing.

Concern over Taiwan also was front of mind in markets.

China says the United States is overstretching the concept of national security, abusing state power to suppress foreign companies after the White House gave government agencies 30 days to remove Chinese-owned app TikTok on federal devices.

In company news, staffing firm Adecco said its hiring activity had weakened modestly at the start of 2023 after it reported weaker-than-expected earnings.

British asset manager abrdn fell to a full-year pretax loss and reported a slide in client funds for 2022, as global markets turmoil and runaway inflation weighed on its finances.

Key developments that may provide direction to U.S. markets later on Tuesday:

* U.S. February consumer confidence, Chicago PMI business survey, Richmond Fed business survey, Feb Dallas Fed services sector survey, U.S. January wholesale, retail inventories, goods trade balance, U.S. December house prices

* Chicago Federal Reserve President Austan Goolsbee speaks; Bank of England Chief Economist Huw Pill and BoE policymaker Catherine Mann speak

* Belarusian President Alexander Lukashenko in Beijing to meet China's President Xi Jinping

* U.S. corp earnings: AutoZone, Agilent, HP, First Solar, AMC Entertainment, Monster Beverage, Sempra Energy etc

Graphic: U.S. Core capital goods orders https://www.reuters.com/graphics/USA-STOCKS/lgpdkonrqvo/corecap.png

Graphic: U.S. Job gains remain strong https://www.reuters.com/graphics/USA-FED/POWELL/xmvjkrbdgpr/chart.png

Graphic: China's falling disposable income https://www.reuters.com/graphics/CHINA-ECONOMY/jnpwyaalypw/chart.png

Graphic: UK business investment has fallen since the Brexit vote https://www.reuters.com/graphics/BRITAIN-EU/ECONOMY/gkplwdmwbvb/chart_eikon.jpg

(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)