U.S. stocks slip; healthcare leads decline STOXX up ~0.7% Dollar down; gold ~flat; oil, bitcoin up; 10-yr US Treasury yield ~1.74% Jan 12 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com BOND MARKETS: DOING ONE"S HOMEWORK PAYS OFF (1120 EST/1620 GMT) "Don"t fight the Fed" is an almost trite adage in bond markets. With at least three Fed hikes priced in for 2022 after U.S. inflation data released today, some fund houses and bank research desks have a different view – focus on buying credit that"s closely linked to the real economy. "While the big recovery trade is behind us, ongoing economic growth is likely to support the credit-sensitive sectors for some time yet, so spreads on these may continue to tighten, boosting excess returns," Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, told the Reuters Global Markets Forum on Friday. "We see opportunities to add value across a range of fixed-income markets from structured products and corporate bonds, to opportunities in emerging markets … It will require more effort in terms of research etc, but opportunities remain and I"m not sure that"s widely appreciated," Tipp said. Similarly, BofA Global Research"s strategists tout a "Prudent Yield" approach to fixed income, entailing buying bonds with more "real economy" exposure and less exposure to risks from inflation and rates. They say the best sectors to own have been "fallen angel" corporate bonds, high-yield municipal bonds, emerging market debt, leveraged loans and convertibles. They expect these instruments to outperform equities and rate-sensitive bonds. Among stocks, however, the bank"s equity team expects 13% dividend growth this year, double the rate of earnings growth, noting a high dividend yield strategy tends to outperform broad equities by 6.7% in late-cycle markets. Tipp said bond markets have been taking into account both the long- and short-term impacts of inflation in some respects. U.S. consumer inflation soared to a new 40-year high, data on Wednesday showed. read more He believes bonds will be effective investments from a top-down perspective in the quarters ahead as rates in many markets are near their peaks. This is "typical timing", in line with rates in recent cycles tending to peak early, as central banks gear up to tighten policy, he said. (Aaron Saldanha, Sanjana Shivdas) ***** HOT ENOUGH FOR YA? DECADES-HIGH CPI SEEN KEEPING FIRE LIT UNDER THE FED (1040 EST/1540 GMT) The latest data released on Wednesday showed the hottest price growth since Ronald Reagan"s first term as president, and reflects the ongoing imbalance between booming demand and a still-snarled global supply chain. But investors were braced for the data, comforted by Federal Reserve Chairman Jerome Powell"s declaration of war against inflation. The Labor Department"s consumer price index (CPI) (USCPI=ECI), which measures the price urban consumers pay for a basket of goods, rose 0.5% in December, hotter than the 0.4% consensus. read more This pushed year-on-year CPI to 7%, the biggest annual increase since 1982. While that figure "will be shocking for some investors," it was also "largely anticipated by many," writes Brian Price, head of investment management at Commonwealth Financial Network. Line by line, a 2.7% monthly jump in airline fares and a 1.8% rise in new/used autos led the charge higher, while a welcome 0.5% drop in gasoline prices helped keep the headline print in check. Core CPI, which strips out volatile food and energy prices, jumped 0.6 percentage points to a 5.5% annual rate. "The market will continue to be laser focused on upcoming changes in the Federal Reserve"s interest rate policy in the coming months," Price adds, saying the report "may exacerbate those calls for earlier rate hikes and possibly an increased tapering of the Fed"s quantitative easing program." On Tuesday, Fed Chairman Jerome Powell, testifying before Congress at his reconfirmation hearing, acknowledged the Fed had misread the inflation tea leaves and said the central bank was determined to keep inflation in check. read more "Yesterday the Fed put on some pretty tough gloves and came out swinging, making it clear that inflation is their top priority and they"re going to fight it," says Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "That was reassuring for the market." The graphic below shows year-on-year core CPI along with other major indicators, all of which continue to soar well above Powell & Co"s average annual 2% target: Inflation Inflation Switching focus to Wednesday"s economic also-ran, demand for home loans increased 1.4% last week, even as increased rates continued to climb, according to the Mortgage Bankers Association (MBA). The average 30-year fixed contract rate (USMG=ECI) jumped 19 basis points to 3.52%, the highest level since March 2020, just before the pandemic"s full force hobbled the economy. Still demand for loans to purchase homes (USMGPI=ECI) gained 2.2%, which easily offset the <0.1% downtick in applications to refinance existing mortgages. The increase in purchase applications could mean some homebuyers are "trying to lock in a mortgage rate before interest rates move higher," suggests Nancy Vanden Houten, lead economist at Oxford Economics, who also says "The rise in rates will take an added toll on homebuying affordability, which has been eroded by a sharp rise in home prices." As the graphic below shows, refi and purchase demand are currently down 50.1% and 16.4%, respectively, from year-ago levels: MBA MBA Wall Street liked the near-inline CPI print, having girded its loins for the data in the wake of Powell"s testimony. All three major U.S. stock indexes were a healthy shade of green, with tech (.SPLRCT) and chips (.SOX) putting the Nasdaq in the lead. (Stephen Culp) ***** SMALL CAPS POISED TO SHINE AS FED TIGHTENS -BOFA (1000 EST/1500 GMT As price-to-earnings ratios expanded in December, small caps remained the least stretched and are now historically cheap on every metric analysts at Bank of America track. With the Federal Reserve poised to soon hike interest rates the P/E implications for small-caps indicate they"ll contract less than for large caps in the initial phase of tightening, BofA analysts said in a note on Wednesday. Valuations expanded across stock sizes last month, with the forward P/E rising 3-4% across the Russell 2000 (.RUT) (to 16.2x from 15.6x), the Russell MidCap (to 19.6x from 18.9x) and Russell 1000 (to 21.6x from 20.9x), BofA said. But for the year, there were multiple contractions, with the P/E falling 14% for small caps, 7% for mid caps and 5% for large caps. Earnings were the main driver of returns, where expectations rose about 30% across the size segments, led by small caps. While back above average, small caps" forward P/E is the least-stretched at 5% above historical averages compared to 30%-40% above average for mid- and large caps, respectively. The long-term valuation framework suggests that the Russell 2000 could see high single-digit annualized returns over the next decade, versus low single-digit annualized returns for the Russell 1000 and slightly negative returns for the S&P 500 (.SPX). (Herbert Lash) ***** FUTURES UP; CPI DATA MEETS EXPECTATIONS (0915 EST/1415 GMT) U.S. stock index futures are higher early on Wednesday, with S&P 500 e-minis up about 0.4%, adding to gains after data on U.S. consumer prices were mostly in line with economists" expectations. The consumer price index increased 0.5% last month, the Labor Department said. Economists polled by Reuters had forecast the CPI gaining 0.4%. read more In the 12 months through December, the CPI surged 7.0%. That was the biggest year-on-year increase since June 1982 and followed a 6.8% rise in November. Investors have been concerned after from the Federal Reserve released minutes last week from their December policy meeting that signaled the central bank may have to raise interest raise rates sooner than expected to curb inflation. Focus will turn to earnings later this week, when some of the big Wall Street banks report results, kicking off the profit reporting period. Here is the premarket snapshot: for Jan 12 for Jan 12 (Caroline Valetkevitch) ***** FOR WEDNESDAY"S LIVE MARKETS" POSTS PRIOR TO 0900 EST/1400 GMT - CLICK HERE: read more