Marketmind: Hot air

A look at the day ahead in European and global markets from Anshuman Daga

Last week, the Federal Reserve and the European Central Bank raised interest rates as expected and flagged that credit conditions would remain as tight as necessary to tame inflation.

Still, stocks rallied and bond yields fell as markets priced in lower rates. The two asset classes enjoyed one of the best Januaries on record.

Now, it appears that some of these expectations were a load of hot air.

And just as a U.S. military fighter jet shot down a suspected Chinese spy balloon, Friday’s blowout U.S. jobs growth data has dashed market hopes that the Fed was close to pausing its monetary policy tightening cycle.

Futures are almost fully priced for a quarter point rate rise in March, and likely another in May, leaving the peak at 5.0%, compared with 4.9% ahead of the jobs data.

The U.S. jobs data showed the unemployment rate hit more than a 53-1/2-year low of 3.4%.

On Monday, as investors pondered U.S. rate increases, Asian equity markets fell 1.9% and were heading for their worst day in three months. The safe-haven dollar strengthened after its recent underperformance.

U.S. stock futures traded lower and FTSE futures indicated a weaker start for British stocks, which vaulted to a record high on Friday. European index futures also traded lower.

Meanwhile, ECB Governing Council member Ignazio Visco, who is also the Bank of Italy’s governor, said on Saturday that the ECB could take a cautious approach to increasing interest rates as short-term inflation expectations had dropped sharply and longer-term ones remained under control.

The ECB raised its key rate by 50 basis points to 2.5% last week and said it would replicate the move in March.

This week, investors will focus on results from a swathe of companies, including BP, Unilever and banks such as BNP Paribas, Societe Generale and troubled Credit Suisse.

In Britain, tens of thousands of nurses and ambulance workers were set to walk out on Monday in an escalating pay dispute with the government, in a move that spelt further disruption for an already strained health system.

The walkout, largely in England, will represent the biggest in the 75-year history of the National Health Service.

Another record was set at the Grammy awards, but a happy one for pop superstar Beyonce, who broke all-time Grammy wins on Sunday by picking up four and was in the running for more, including the prestigious best album accolade.

Key developments that could influence markets on Monday:

Economic data: Euro zone Feb sentix survey, Dec retail sales; Global PMIs Jan, final; German Dec industrial orders;

U.S. results: Hasbro, Simon Property

(Reporting by Anshuman Daga; Editing by Bradley Perrett)