LONDON - World stocks stalled, Treasuries held on to price gains and the dollar was nursing heavy losses on Friday ahead of U.S. non-farm payrolls data, the next big test for investors looking for more signs of a rates policy shift from the Federal Reserve.
Data overnight including falling U.S. job openings and contracting U.S. manufacturing activity, raised fresh hopes of easing cost pressure and added to evidence that Fed rate hikes may have cooled the economy.
"The U.S. growth story is reasonably strong looking at December payrolls, business inventories and even the current trackings of U.S. GDP are better than average," said Rich Kelly, head of global strategy at TD Securities in London.
This data would indicate that the U.S. Fed might not need to hike at the same pace, Kelly said, adding: "There will be a long-term cost to the phenomenal growth we've seen in the past 10 years, combined with the missteps of policymakers".
In Europe ,the direct impact of war, inflation and a softer economic starting point would bring rolling recessions, he said.
European Central Bank President Christine Lagarde warned on Friday that some European governments' fiscal policies could lead to excess demand, and that fiscal and monetary policies need to work in sync for sustainable, balanced economic growth.
Bruno Schneller, managing director at INVICO Asset Management, said while stocks have risen recently, the most important factor was quantitative tightening -- a process by which the Fed winds down the bonds on its balance sheet.
"Global markets have been hyperfocused on the Fed's pace of hikes," said Schneller.
"We think the damage is not done yet. All the central bank liquidity that has gone in and out of the economic system has a 70% correlation to equity market returns and the liquidity drain will be hard to fight."
Schneller expected stock markets to be 10% lower by year-end and to tumble further by the end of the first quarter of 2023.
European stocks were largely flat on Friday, with London's FTSE down 0.2% and France's blue-chip CAC 40 slipping 0.18%, while Germany's main stock market crept up by 0.30%.
U.S. futures indicated a flat open for Wall Street shares . They ended mixed on Thursday after a big rally the day before, buoyed by comments from Fed Chair Jerome Powell that did not sound as hawkish as some had feared.
Economists polled by Reuters expect data out at 1330 GMT to show the U.S. economy created 200,000 new jobs in November, the smallest number since December 2020. Payrolls rose by 261,000 in October.
Futures fully price in a 50 basis points rate hike at the Fed's December policy meeting, while rates are now expected to peak around 4.75% to 5% by mid next year, compared with 5% to 5.25% previously.
Investors were also watching for more signs that Beijing is easing its zero-COVID policy, and whether China would contribute more to global growth next year amid a looming global recession.
Treasury yields, meanwhile, fell for a third straight day.
The yields on benchmark 10-year Treasury notes fell to 3.52%, near lows not seen since turmoil in UK markets in September pushing yields in other major bond markets higher.
The two-year Treasury yield, which rises with traders' expectations of higher Fed fund rates, fell to its lowest level in almost two months at 4.204% and was last down around 5 basis points on the day.
And in currency markets, the U.S dollar wallowed near five-month lows against a basket of other major currencies. It was set for a 2% weekly drop.
The euro hit a fresh five-month high just above $1.05, while the Japanese yen scaled a new three-month high against the U.S. dollar.
In the oil market, prices seesawed ahead of a key meeting of producing countries over the weekend. U.S. crude oil futures rose 2% from its early hours trading to $81.90 before dropping back to $81.77 per barrel.
Brent crude futures also rose slightly to $87.28 per barrel.
Spot gold fell from its morning highs to $1,797.
(Additional reporting by Stella Qiu; Editing by Kenneth Maxwell, Toby Chopra and Alexander Smith)