LONDON- The rebound in share prices took a pause on Thursday as investors geared up for crucial a U.S. inflation report that should offer new clues on the pace of Federal Reserve interest rate hikes.

European stocks were mostly higher or unchanged on the day, while U.S. futures pointed to small declines at the open on Wall Street .

The pullback in government bond yields in recent days and a tech-fuelled rebound have helped broader stock markets rally this week, with a particularly strong performance Wednesday in the United States.

But the big test for sentiment comes later in the form of U.S. inflation numbers. Data due later on Thursday is expected to show U.S. consumer inflation racing at a 7%-plus annualised clip in January, a level reminiscent of the inflation shocks of the 1970s and 1980s.

The Fed is broadly expected to begin raising rates at its March meeting although there is no clarity about the pace of tightening.

Money markets are certain of at least a quarter point Fed hike next month, and give 1-in-4 odds of a half point increase.

"Inflation and central banks' response to it remain front and centre in investors' minds and while the situation has not improved in recent weeks, there has been a clear upturn in sentiment," said Craig Erlam, senior market analyst at OANDA.

He said investors seemed to be comfortable with four or five Fed hikes priced in for 2021.

"Of course, that depends on inflation not spiraling out of control, forcing the Fed to be more aggressive. The CPI data is expected to show prices rose 7.3% in January compared to a year ago, almost four times the Fed's target. Another reading above here could spook the markets once more, which may explain the cautious advance we're seeing so far today," he added.

By 0940 GMT, the Euro STOXX was 0.05% lower while the FTSE 100 was 0.1% higher .FTSE and the German DAX 0.25% ahead.

In Asia, Chinese blue chips lost 0.26% as investors took profits and worries about U.S. sanctions continued to weigh on sentiment. 

Taiwan's benchmark, however, rose while Japan's blue-chip Nikkei was 0421% higher.

MSCI's broadest index of Asia-Pacific shares added 0.58%.

 

YIELDS BELOW RECENT HIGHS

Long-term bond yields continued Wednesday's retreat, with the 10-year U.S. Treasury yield slipping back to 1.923% from a near 2-1/2-year peak on Tuesday, before settling at 1.942% . Its German counterpart DE10YT=RR was below a three-year high hit on Tuesday.

"It was a more positive session for global bonds, with European bond yields taking a breather from their seemingly relentless recent rise," Damien McColough, head of rates strategy at Westpac, wrote in a client note.

"Even so, global bond yields have entered a bear phase and investors are likely to demand a higher premium to invest given inflation and policy risks ... so we remain better tactical sellers."

Currencies were largely in a holding pattern ahead of the inflation release, with the dollar index =USD dipping slightly to 95.478 after bouncing off a two-week low of 95.136 on Friday. FRX/

One euro bought $1.144 and the yen traded at 115.82 per dollar , down marginally on the day.

The combination of a soft dollar and lower bond yields helped gold, which held close to a two-week high, last changing hands at around $1,831 an ounce. 

Crude oil prices rose after falling in Asian trading, with U.S. West Texas Intermediate futures up 0.78% at $90.38 a barrel, while Brent crude futures gained 0.57% to $92.07 a barrel.

(Additional reporting by Kevin Buckland in Tokyo) ((thomas.wilkes@thomsonreuters.com))