By Marc Jones

LONDON (Reuters) – Stocks stalled and the dollar and bond yields edged higher on Monday as record euro zone inflation, weak Chinese data and Russia’s withdrawal from a crucial grain pact set traders up for another bumper Federal Reserve rate hike this week.

A potentially pivotal week for U.S. monetary policy was given a new twist from renewed “terminal rate” speculation, with the worrying growth signals from China and global inflation fears also stoked by higher agricultural prices.

Wall Street futures nudged 0.3% lower after a strong surge by U.S. markets on Friday, while Europen stocks were broadly flat as China’s weaker-than-expected factory data kept the mining <.SXPP > and oil and gas sectors in the red.

Euro zone inflation also came in higher than economists had been expecting too, hitting a record of 10.7% year-on-year, in what will make for more uncomfortable reading for the European Central Bank, which is targeting 2% price growth.

Combined with news that Italy’s economy grew far more strongly than expected in the third quarter, euro zone bond yields moved higher [EUR/GVD] although the euro succumbed to another bout of U.S. dollar strength. [/FRX]

“A lot of data is coming out this week and lot of central banks are meeting,” said Societe Generale strategist Kit Juckes.

“The striking news so far (today) is that China is slowing… We will see what Australia does tomorrow and then the Fed on Wednesday and Bank of England on Thursday,” he added, referring to rate hike moves.

Graphic: Energy and food inflation continue to soar – https://graphics.reuters.com/EUROZONE-ECONOMY/znvnbdnedvl/chart.png

Russia’s withdrawal from a deal to allow Ukrainian grain shipments to reach global buyers at the weekend saw wheat futures leap more than 8% at one point, before paring the gains to around 6% or $8.75 a bushel in Europe.

Moscow suspended its participation in the Black Sea deal on Saturday in response to what it called a major Ukrainian drone attack on its fleet in Russia-annexed Crimea.

Twelve ships carrying grain did though manage to leave Ukrainian ports on Monday, suggesting Moscow had stopped short of reimposing a full-scale blockade for now.

“Depending on the scramble to replace planned Ukraine cargoes, prices might even head into double digits for a period,” said Commonwealth Bank of Australia strategist Tobin Gorey. Palm oil futures rose nearly 5%.

Graphic: Key food and energy prices drop after initial panic – https://fingfx.thomsonreuters.com/gfx/mkt/klvygebkjvg/Pasted%20image%201667217490995.png

SPOOKED

Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2%, though China stocks were held down by an unexpected fall in Chinese factory data and this month will be the regional index’s tenth monthly fall in a row.

The yuan also tumbled again and is headed for its eighth straight monthly fall – its longest losing streak since 1994. [CNY/]

The resignation of the chair of Beijing-based property developer Longfor Group also unnerved investors, with shares dropping 20% in Hong Kong and the sector under pressure.

In contrast Japan’s Nikkei ended 1.8% higher and is set for its best month in nearly two years amid an ongoing slid in the yen which is helping exporting firms.

The mixed performance follows an erratic earnings season on Wall Street and bond and currency markets tempering some wagers on a possible change in tone from the Fed this week. The dollar, after posting two weeks of losses, steadied on Monday and rose 0.5% on the yen.

“Things had gotten too pessimistic,” said Jun Bei Liu a portfolio manager at Tribeca Investment Partners in Sydney, of recent gains. Heavy drops in U.S. tech giants perhaps signal enough bad news is now already in the price, she said.

Yet Treasuries slipped a little further, with benchmark 10-year yields up 2 basis points to 4.0375%, while Germany’s 10-year government bond yield, the benchmark for the euro area, was up 3 basis points (bps) to 2.130%. [GVD/EUR]

Focus was also on Brazil’s markets after leftist leader Luiz Inacio Lula da Silva narrowly defeated right-wing President Jair Bolsonaro in a runoff election on Sunday.

Early indications pointed to a bumpy ride with speculation swirling around the makeup of Lula’s cabinet and the risk that Bolsonaro disputes the narrow result. Shares of U.S.-listed Brazilian firms such as oil major Petrobras and iron ore miner Vale fell 9.7% and 2.9% respectively.

The Fed meanwhile is all but certain to raise rates by 75 basis points on Wednesday, with markets focused on the communication of the outlook.

The latest round of hopes for a shift in the Fed’s tone seems to have stemmed from a Wall Street Journal article two weeks ago, flagging a possible discussion about slowing hikes.

But a report from the same author over the weekend pointed to a lengthy period of high rates and traders have now tempered initial optimism, pricing in the funds rate to hit near 5% by May next year.

In the oil markets, Brent crude futures fell 1% to $94.65 a barrel, while spot gold was fractionally lower at $1,637 an ounce in the precious metals markets. [O/R][GOL/]

“We need to be very careful and differentiate between central banks peaking, and central banks pivoting,” said NatWest Markets’ head of economics and strategy, John Briggs.

“Peak means the year-to-date trends of surging yields, surging dollar, and weak risk assets can lose momentum, but I think we need more visibility on a pivot to fully reverse all those.”

(Additional reporting by Tom Westbrook in Singapore; Editing by Kirsten Donovan and Angus MacSwan)