Shares rise slightly, bonds steady ahead of inflation data

The pan-European STOXX index rose nearly 1%, led by bank shares as lenders were lifted by increased expectations of European Central Bank rate hikes

Shares crept up slightly and bonds held steady on Tuesday as investors awaited the next round of likely gloomy inflation data while also juggling concerns about Europe's energy crisis, a looming recession and more rate hikes.

The pan-European STOXX index rose nearly 1%, led by bank shares as lenders were lifted by increased expectations of European Central Bank rate hikes, while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6%.

U.S. shares looked set to follow suit with S&P futures up 1% as markets recovered from a round of selling following hawkish remarks by Federal Reserve Chair Jerome Powell at the Jackson Hole conference last week.

Euro zone government bond yields were little changed as traders awaited the latest policy signals and this week's inflation data, following a start to the week in which yields soared after a round of policymaker warnings about inflation.

Germany's 10-year yield traded at 1.496%, unchanged on the day but close to the two-month high reached on Monday of 1.548%.

Besides interest rates, the health of China's economy is also at the forefront of investor concerns. China's benchmark Shanghai Composite Index shed 0.6% on news that several big cities had ramped up COVID-19 restrictions.

Hong Kong's Hang Seng was also dragged 0.37% lower as investors started walking back their enthusiasm about an agreement struck between China and the United States for access to Chinese companies' audit papers.

At the Jackson Hole conference, the Fed's Powell and European Central Bank speakers flagged the need for bolder action to tackle inflation, driving selling of bonds and equities as traders jacked up near-term interest rate expectations.

The markets' focus for the next couple of weeks, at least, will be the likely Fed action, said Manishi Raychaudhuri, head of APAC equity research at BNP Paribas.

Earlier, there was talk of a pivot to a possible cutting of interest rates by the Fed, maybe in 2023 second half or so, but that is now sort of falling by the wayside, he said. Higher for longer (interest rates) is possibly the kind of narrative that's building up.

Futures markets have odds of better than two-thirds that the ECB raises rates by 75 basis points in September, and see about a 70% chance that the Fed does likewise.