LONDON/TOKYO Jan 5 (Reuters) - Global equities were on track to snap a nine-week winning streak, while the dollar was poised for its strongest weekly advance since mid-May, as bets on aggressive central bank rate cuts were rolled back.
MSCI's broadest index of global stocks was flat on the day, but heading for a 1.78% decline this week.
Europe's Stoxx 600 index sank 0.8%, Asia-Pacific shares outside Japan dropped 0.5% and government bond yields rose as prices of the interest rate-sensitive debt securities fell.
The moves came as Euro zone inflation data on Friday showed prices in the currency bloc rose 2.9% year-on-year in December, up from 2.4% in November, easing pressure on the European Central Bank to start cutting borrowing costs from record highs.
Caution was also rising ahead of the keenly watched U.S. monthly non-farm payrolls figures later in the day.
Global markets rallied hard at the end of last year as traders priced in about six rate cuts for 2024 by the U.S. Federal Reserve and significant monetary easing by the ECB.
"A weak opening to equity markets in 2024 suggests that investors are experiencing a hangover after December's exuberance, waking up to the reality that the optimistic upturn may have been too much too soon," said Lewis Grant, senior portfolio manager for global equities at Federated Hermes Limited.
Traders on Friday saw little better than 2-in-3 odds that the Fed would start cutting its funds rate from a 22 year high of 5.25% to 5.5% as soon as March, down from a 71% chance priced in a week ago, according to the CME Group's Fedwatch tool.
Fed chair Jay Powell "is only going to go as far as the data is going to let him go, so the question about pricing is whether the six rate cuts that were priced in were too many," added Joe Kalish, chief global strategist at Ned Davis Research.
"They may be too many or not enough, but that will all depend on the data."
Overnight, Wall Street's S&P 500 retreated 0.34%, taking its losses this week to 1.7%, setting up its first weekly decline since late October. Futures pointed to a further 0.2% drop at the reopen.
The U.S. dollar index, which measures the currency against a basket of six major peers, added 0.3% to 102.73. For the week, it is up 1.35%.
The 10-year Treasury yield, which tracks expectations of long-term borrowing costs and rises as the price of the debt security falls, climbed 4 basis points (bps) to 4.034%. This key debt yield has risen almost 18 bps this week.
Germany's 10-year bund yield rose 6 bps to 2.16% on Friday, up 13 bps over the week.
In Asia, Japan's Nikkei bucked the downtrend for global equities, bouncing 0.3% on Friday as exporters got a boost from a weaker yen. The dollar rose 0.4% to 145.2 yen.
A deadly New Year's Day earthquake on Japan's sea coast has also forced wagers for the ultra-dovish Bank of Japan to tighten monetary policy this month off the table.
"The Bank of Japan's continued reluctance to give a timetable for normalisation is running up against the Fed's push-back on the aggressive rate-cut path the market was pricing in a week ago," said James Kniveton, senior corporate forex dealer at Convera.
"That has seen the dollar climb against the yen as the interest rate differentials reassert themselves."
Elsewhere, gold slipped 0.3% $2,037 per ounce, on track for a 1.3% weekly slide.
Oil markets remained volatile on Friday as expectations of weak demand from China clashed with concerns about Red Sea supply disruptions following attacks on ships by Yemen's Iran-backed Houthis. Brent crude futures were up 0.9% at $78.28 per barrel, after settling down 0.8% overnight.
For the week, the global oil benchmark is up 1.6%
(Reporting by Kevin Buckland and Naomi Rovnick; Additional reporting by Ankur Banerjee; Editing by Jamie Freed, Muralikumar Anantharaman and Ros Russell)
