Stock markets dropped across the globe on Friday and the dollar leapt to six-week highs as jobs data revived expectations the U.S. central bank would stick to its monetary tightening path.
Data from U.S. Labor Department overnight showed monthly producer prices had accelerated in January and the number of Americans filing new claims for unemployment benefits had unexpectedly fallen last week - another sign of a tight labour market keeping pressure on inflation.
MSCI's broadest index of world stocks fell 0.4% to one-week lows at 645.73.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.36% to 529.49, its lowest since Jan. 9. The index is down 3% for the month and set for its third straight week of losses.
In Europe, the pan-European STOXX 600 index dropped 0.64%, set for its first daily fall this week. The German DAX was down 0.82%. French blue chip stocks and the Britain's FTSE slipped from all-time highs, down 0.67% and 0.23% respectively.
Stock performance across the Atlantic was also set to follow suit with S&P 500 futures down 0.63%.
It's hard to gauge how markets will interpret the Fed's next moves on inflation, said Florian Ielpo, head of macro at Lombard Odier Asset Management.
"The markets are torn between two instruments. Intra-day stock prices and credit spreads see a lot of volatility and nervousness while there has been no surge in implied volatility options," said Ielpo.
Traders have raised their bets on how far they see the Fed hiking, now pricing in a peak at around 5.3% in July. Bets on a rate cut at year-end have declined, with traders pricing in a 75% chance of a 25 bps rate cut in December.
Two Fed officials said on Thursday the U.S. central bank probably should have lifted interest rates more than it did early this month, and they warned that additional rises in borrowing costs were essential to lower inflation back to desired levels.
At its Jan. 31-Feb. 1 policy meeting, the Fed opted to moderate the pace of interest rate rises, lifting rates by 25 basis points to the 4.50%-4.75% range after a series of jumbo rate increases last year.
But since then economic data has pointed to a tight labour market and sticky inflation keeping the pressure on the central bank to remain on its tightening path.
"No matter how you cut it, (U.S.) inflation was hot," said Tapas Strickland, head of market economics at National Australia Bank. "The latest data supports the Fed view of needing to continue to raise rates and hold them there higher for longer."
Bets on higher peak rates have pushed two-year U.S. Treasury yields, sensitive to interest rate expectations, to 3-month highs at 4.69%. The yield on 10-year Treasuries was up about 5 basis points at 3.90% on Friday.
Boosted by bets on higher rates, the dollar index, which measures the U.S. currency against six major rivals, rose as much as 0.4% on Friday to 104.24, a fresh six week high.
The euro and sterling both fell to their lowest in over a month. The euro was down 0.3% at $1.0639, while sterling was last trading at $1.1941, down 0.4% on the day.
The Japanese yen climbed 0.7% to 134.89 per dollar.
Elsewhere, U.S. crude fell 2.45% to $76.57 per barrel and Brent was at $83.16, down 2.33% on the day.
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