Jittery global financial markets have seen signs of stabilisation, with major equity bourses and bond yields holding their ground and the dollar wilting after the highest US inflation reading in nearly 40 years.
The 7 per cent year-on-year US consumer price inflation reading was the highest since 1982, but after weeks of Federal Reserve officials talking about faster interest rate hikes and stimulus withdrawal it had been widely expected.
MSCI's 50-country index of world stocks barely budged, little changed from where it started the year, while Europe dipped fractionally after two days of solid gains and as the euro climbed to its highest in nearly two months.
Asian markets had weakened slightly as well on softer-than-expected Chinese lending data and more falls in the property sector, but futures markets pointed to a steady restart for Wall Street which had closed higher on Wednesday.
"As we see it, the inflation story is going to persist for good a while longer yet," said Manulife Asset Management's global macro strategist Eric Theoret.
"We have had a tremendous acceleration in the Fed's tightening," he added. Theoret pointed out that when the US central bank raised interest rates in 2015 it waited two years before shrinking its balance sheet, whereas this time it could begin by the end of the year.
"The challenge from here is how the global economy responds to this normalisation."
In the bond markets, where borrowing costs have raced to keep up with rate hike expectations this year, 10-year US Treasury yields hovered around 1.74 per cent and Germany's 10-year yield was up a modest 2 basis points at -0.039 approaching positive yield territory for the first time since May 2019.
In a busy period for bond issuance as countries and companies look to beat the rise in rates, Italy was due to sell up to 7 billion euros of three- and seven-year bonds later, Ireland was eyeing a bumper sale. The week was also set to be a record one for emerging market corporate debt with nearly 30 sales taking place.
"It is a record in my time," said Omotunde Lawal, head of emerging markets corporate debt at Barings. "Most people are swamped, but you can see why with as many as four Fed hikes now priced in."
In the currency markets, the dollar was continuing to slip towards a 2-month low against a basket of currencies. The euro was a big beneficiary of the move and extended its rise to $1.1479, up 0.3 per cent on the day, while sterling and the yen also extended recent gains.
The pound is up more than 4 per cent from December lows and traders have so far shrugged off a political crisis enveloping Prime Minister Boris Johnson who apologised for attending a party in the Downing Street garden during a coronavirus lockdown.
The central bank of New Zealand has begun hiking rates too, and the New Zealand dollar rallied 0.4 per cent to $0.6876, its strongest since late November.
Australia's dollar, which tends to perform well when broader market sentiment is improving, added 0.3 per cent to $0.7305.
The Canadian dollar has rallied more than 3.5 per cent in three weeks, gaining with oil prices as investors look past the potential economic fallout of the Omicron variant.
"The dollar does not have to increase because the Fed is readying a tightening cycle," said Commonwealth Bank of Australia strategist Joe Capurso.
"It is not a simple equation of Fed hikes equals dollar increases. The dollar is a counter-cyclical currency which decreases as the world economy recovers."
In Asia, Chinese blue-chips dropped 1.3 per cent after data showing mainland bank lending fell more than expected in December causing property and consumption sectors to sink.
MSCI's broadest index of Asia-Pacific shares outside Japan was flat after recording its biggest daily gain in a month on Wednesday. Japan's Nikkei lost nearly 1 per cent after surging nearly 2 per cent a day earlier.
Oil prices ticked lower in commodity markets too, a day after hitting their highest in nearly two months.
Global benchmark Brent crude fell 0.07 per cent to $84.61 per barrel and US West Texas Intermediate crude edged down to $82.58 per barrel. Spot gold held steady at $1,824.54 an ounce.