US and European stocks rise as bond sell-off abates, focus on inflation

By Harry Robertson

LONDON (Reuters) - U.S. and European stocks ticked higher on Tuesday as a sell-off in bonds moderated, although investors remained cautious ahead of U.S. consumer price inflation data on Wednesday and Donald Trump's inauguration as president next week.

In early U.S. trading, the S&P 500 rose 0.38% to 5,858.22 and the Nasdaq Composite climbed 0.55%.

Data on Tuesday showed the U.S. producer price index climbed 0.2% month-on-month in December, below expectations for a 0.3% increase and down from 0.4% in November. Stocks and bonds initially rallied further, although both moves later reversed.

The main focus for the week is U.S. consumer price data on Wednesday, which is expected to show month-on-month inflation held at 0.3% in December while the year-on-year figure climbed to 2.9%, from 2.7% in November.

"We got PPI today, which came in softer than expected, so that was a huge relief for markets," said Aneeka Gupta, equity strategist at WisdomTree.

"But I think they are well aware that the big mover will be from the inflation data we get tomorrow," she said, adding the key concern remained rising yields weighing on equity market valuations.

European shares climbed too on Tuesday, with the continent-wide STOXX 600 up 0.3%, after falling 0.6% on Monday, and Germany's DAX 0.8% higher.

Speculation about tariffs was one factor boosting global equities, analysts said, after Bloomberg reported that Trump's aides were weighing ideas including increasing tariffs by 2% to 5% a month to increase U.S. leverage and to try to avoid an inflationary spike.

"The market remains focused on Trump and what measures he will present when he is sworn in as president next week," said Elisabet Kopelman, U.S. economist at European bank SEB.

BOND YIELDS COOL

Equities have wobbled in recent weeks as bond yields have surged on the back of strong U.S. economic data and concerns about Trump's tariffs pushing up prices.

Markets are now expecting just 29 basis points of cuts from the Fed this year, from around 43 bps before Friday's stronger than expected U.S. jobs data.

Higher yields have weighed on equities by making bonds relatively more attractive and increasing the cost of borrowing for companies. The Russell 2000 index of smaller U.S. stocks is down around 11% from a peak in November.

Benchmark 10-year U.S. Treasury yields steadied to trade 1 basis point lower on Tuesday at 4.792%, after hitting 4.805% on Monday, the highest since early November 2023. Yields move inversely to prices.

A slight dip in oil prices, which hit their highest since August on Monday after the U.S. tightened sanctions on Russia, also helped the mood.

British 10-year bond yields steadied at 4.882%, after surging to their highest since 2008 last week at 4.925%, piling pressure on finance minister Rachel Reeves.

The dollar index, which measures the greenback against a basket of currencies, hit its highest in more than two years at 110.17 overnight and was last little changed at 109.51 [FRX/].

In Asia overnight, Japan's Nikkei slumped 1.8% as investors shed chip stocks and worried about a possible Bank of Japan interest rate hike.

Bank of Japan Deputy Governor Ryozo Himino, in a speech to Japanese business leaders, left the door open to a rate hike at the conclusion of the next policy meeting on Jan. 24.

Chipmaker stocks have been under pressure following new U.S. restrictions on exports. (This story has been refiled to add bullet points)

(Reporting by Harry Robertson; Editing by Christina Fincher)