Chinese shares in Hong Kong dropped after a 2% gain on Monday, while Japan’s Topix Index advanced after reopening following a public holiday. Gauges in Australia and Southeast Asia also fell. Contracts on the S&P 500 slipped after the index failed to stay above the key 3,900 level, erasing an advance that reached almost 1.5%. 

Traders hoping for a quick end to aggressive rate hikes as global inflation cools had a reality check on Monday, when Fed Bank of San Francisco president Mary Daly said she expects the central bank to raise rates to somewhere over 5%. Her Atlanta counterpart Raphael Bostic noted that policy makers should hike above 5% by early in the second quarter and then go on hold for “a long time”.

That leaves those betting on slower hikes waiting on Thursday’s US inflation report, which will come out almost a week after the latest jobs data showed that wage growth has decelerated. The figures will be among the last such readings policy makers will see before their gathering on 31 January.

“Expect some profit taking, position squaring ahead of the CPI print later this week,” said Craig Johnson, chief technical research analyst at Piper Sandler & Co. “That is the next major event for global markets. I suspect most traders will be pretty flat coming into the economic print.”

The Bloomberg Dollar Spot Index was little changed, while the greenback was mixed against its G10 counterparts on Tuesday. Treasury 10-year yields held at 3.54%. Japan’s 10-year yield was at 0.5%, the ceiling for the Bank of Japan’s yield control policy. 

“In addition to the probability of interest rates remaining high and a possible economic slowdown, any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Chris Larkin at E*Trade from Morgan Stanley. “It could be a recipe for choppy near-term and long-term trading.”

Concerns about recessions in the US and Europe this year have been countered by renewed optimism over China. The world’s second-largest economy made an abrupt U-turn on strict Covid restrictions in early December and swiftly followed up with other market-friendly changes. 

The Chinese economy is now forecast to expand by 4.8% this year, according to data compiled by Bloomberg. Still, deflationary pressure worsened in the fourth quarter, with price growth likely to be subdued even when the economy rebounds later this year, according to China Beige Book International. 

“Expectations for China are improving, but economic data may not lend validation until the country’s rampant Covid outbreak runs its course,” said Nitin Chanduka, a strategist at Bloomberg Intelligence. 

Equities in developing nations entered a bull market amid a rally fueled by optimism over China’s reopening and a weakening dollar. The MSCI Emerging Markets Index advanced 2.5% on Monday to over 20%. BM/DM