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Shares and bonds chastened as Fed urges caution

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LONDON, Nov 14 (Reuters) –

Shares steadied and bond yields remained close to multi-year highs on Monday after a top U.S. central banker warned investors against getting carried away over a single data point showing signs of success in the battle against inflation.

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A modest miss on U.S. inflation was enough to see two-year Treasury yields dive 33 basis points for the week and the dollar lose almost 4% – the fourth biggest weekly decline since the era of free-floating exchange rates began over 50 years ago.

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However, the resulting easing in U.S. financial conditions was not entirely welcomed by the Federal Reserve, with Governor Christopher Waller saying on Sunday it would take a string of soft reports for the bank to take its foot off the brakes.

Waller added the markets were well ahead of themselves on just one inflation print, though he did concede the Fed could now start thinking about hiking at a slower pace.

Futures are wagering heavily on a half-point rate rise to 4.25-4.5% in December, and then a couple of quarter-point moves to a peak in the 4.75-5.0% range.

Two-year yields edged down to 4.39%, after diving as deep as 4.29% on Friday.

Germany’s 2-year government bond yield, more sensitive than other maturities to policy rate changes, was down 1.5 basis points (bps) to 2.11% after hitting its highest since December 2008 at 2.252% last week.

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“The CPI downside surprise aligns with a broad range of indicators pointing to a downshift in global inflation that should encourage a moderation in the pace of monetary policy tightening at the Fed and elsewhere,” said Bruce Kasman, head of economic research at JPMorgan.

“This positive message needs be tempered by the recognition that downshift in inflation will be too little for central banks to declare mission-accomplished, and more tightening is likely on the way.”

The benchmark European STOXX index rose 0.15%, and MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.5%, after jumping 7.7% last week.

U.S. markets looked set to open lower, with S&P E-mini futures down 0.44%.

EYES ON CHINA

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Chinese stocks gained on reports that regulators have asked financial institutions to extend more support to stressed property developers.

China’s real estate index jumped 3.5% in response. Blue chips rose 0.2%, helped by a slew of changes to China’s COVID curbs, even as the country reported more cases over the weekend.

“It’s hard to see how the case news is anything but negative from an economic standpoint, but it’s the symbolism of the movement, however small, in the zero COVID strategy that markets are happily latching onto,” said Ray Attrill, head of FX strategy at NAB.

The support for China’s property sector, which consumes a vast amount of metals, boosted copper towards a five-month high. Three-month copper on the London Metal Exchange (LME) rose 0.3% at $8,519 a tonne.

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U.S. President Joe Biden met Chinese leader Xi Jinping in person on Monday for the first time since taking office on the Indonesian island of Bali ahead of a Group of 20 (G20) summit. Bilateral relations are at their lowest level in decades amid disagreements over Taiwan, Russia’s war in Ukraine and North Korea’s nuclear ambitions.

CRYPTO CONTAINED

Last week’s collapse of crypto exchange FTX and the resulting plunge in cryptocurrencies seems so far not to have tainted other asset classes, as regulators pick through the wreckage and investors in the digital assets look on nervously.

Bitcoin recovered 2.9% to $16,788, having shed almost 22% last week, but FTX’s native token, FTT , was last down 2.4% at $1.38, taking its month-to-date losses to nearly 95%.

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The dollar steadied amid fading expectations of a less aggressive Federal Reserve interest rate hike following Governor Waller’s intervention over the weekend.

The dollar index was last seen on Monday at 107.15, still well short of last week’s 111.280 top, while the euro eased a touch to $1.02875, after climbing 3.9% last week.

Sterling eased back to $1.1766 ahead of the British finance minister’s Autumn Statement on Thursday, where he is expected to set out tax rises and spending cuts.

The firming dollar also dragged down oil prices, despite the hopes of a demand boost from China’s hints at reopening.

Brent crude futures were down 52 cents, or 0.59%, to $95.42 a barrel by 1128 GMT after settling up 1.1% on Friday.

(Reporting Lawrence White and Wayne Cole; Editing by Shri Navaratnam, Kenneth Maxwell, William Maclean and Gareth Jones)

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