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Uneasy Chair

FILE PHOTO: Federal Reserve Chair Jerome Powell speaks in Washington

A look at the day ahead in U.S. and global markets from Mike Dolan.

Even as disinflation takes hold and recession looms, Federal Reserve Chair Jerome Powell may have to deliver another uncomfortable message of more monetary tightening ahead before the Fed hunkers down for its final meeting of the year.

World markets will be in thrall to Powell's speech at 1330 Washington time (1830 GMT), not least because it's one of the final set pieces before the Fed's self-imposed blackout period ahead of its December 14 policy decision.

But unless he goes very much against the grain of his colleagues, Powell will likely reinforce market expectations of downshift in the size of interest rate rises but point to a terminal rate of 5% or higher next year and push back on hopes of any early easing from there.

While inflation looks past its peak, labour markets remain super tight and Powell speaks before another crucial nationwide employment report on Friday. However, he will get a glimpse on Wednesday of this month's private sector payrolls from the ADP survey and a readout on closely monitored job openings.

Futures market expectations for peak Fed rates next May ticked back above 5% ahead of the speech, with about 35 basis points of rate cuts from there still priced by yearend. Ten-year Treasury yields were steady at 3.70% and Wall St stock futures were mostly flat after closing in red on Tuesday for the third day running.

While New York Fed chief John Williams indicated this week that rate cuts would not come before 2024, Bank of America economists on Tuesday reckoned a recession hitting by the middle of 2023 may force that cut shortly after.

Many expect Powell to focus today on the longer-term horizon for interest rates, not least as a long-running debate on possibly raising the 2% inflation target has resurfaced in the background this week.

Hopes of peak global inflation were reinforced on Wednesday by data showing euro zone consumer price growth falling back more than forecast to 10% this month from 10.6% in October, lifting euro stocks and bonds and the currency.

The dollar slipped back a touch, especially against China's yuan.

China and Hong Kong shares extended gains on Wednesday as market participants cheered an easing of COVID-19 measures in Guangzhou city. Southern Guangzhou city relaxed COVID prevention rules in multiple districts - even as protests and clashes with police escalated - offsetting the gloomier factory and service sector business readings for this month

China's factory activity contracted at a faster pace this month, weighed down by the COVID curbs and softening global demand.

Key developments that may provide direction to U.S. markets later on Wednesday:

* US Nov ADP private sector payrolls and Oct JOLTS data on job openings, Q3 GDP revision, Oct international trade, retail and business investores, pending home sales

* US Federal Reserve Chair Jerome Powell speaks in Washington. Fed Board Governors Michelle Bowman and Lisa Cook both speak.

* US Federal Reserve releases Beige Book on economic conditions

* US corporate earnings: Salesforce, Synopsys, Hormel Foods

* U.S. President Joe Biden welcomes French President Emmanuel Macron for state visit to the United States

Graphic: What Wall Street thinks of the Fed's messaging https://graphics.reuters.com/USA-FED/POWELL/lbpgnwkodvq/chart.png

Graphic: Analysts lower Brent and WTI forecasts for 2023 https://graphics.reuters.com/OIL-PRICES/POLL/klvygkogrvg/chart.png

Graphic: China's factory activity falls in November https://graphics.reuters.com/CHINA-ECONOMY/PMI/zgpobmlqavd/chart.png

Graphic: Euro zone inflation drops https://graphics.reuters.com/GLOBAL-MARKET/byprljdmmpe/chart.png

(By Mike Dolan, editing by Alexandra Hudson mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)