Adds Japanese bonds

By Wayne Cole

SYDNEY, Aug 5 (Reuters) -Share markets slid and bonds rallied in Asia on Monday as fears the United States could be heading for recession triggered mass risk aversion and wagers interest rates will have to fall sharply, and quickly, to support growth.

Investors began where they finished on Friday by knocking Nasdaq futures NQc1 down 1.87%, while S&P 500 futures ESc1 dropped 1.22%.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS lost 0.7%, while Japan's Nikkei .N225 shed another 5.5% to hit seven-month lows.

Japanese 10-year bond yields JP10YT=RR fell a steep 17 basis points to the lowest since April at 0.785% as markets radically reconsidered the prospect of another hike from the Bank of Japan. 0#BOJWATCH

Treasury bonds were in demand with 10-year yields US10YT=RR down at 3.755%, the lowest since mid-2023.

Two-year yields US2YT=RR sank 50 basis points last week to 3.82% and could soon slide below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.

The worryingly weak July payrolls report saw markets price in a near 70% chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points. Futures imply 155 basis points of cuts this year, with a similar amount in 2025. FEDWATCH

"We have increased our 12-month recession odds by 10pp to 25%," said analysts at Goldman Sachs in a note, though they thought the danger was limited by the sheer scope the Fed had to ease policy.

Goldman now expects quarter-point cuts in September, November, and December.

"The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks," they added. "If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September."

Analysts at JPMorgan were even more bearish, subscribing a 50% probability to a U.S. recession.

"Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November," said economist Michael Feroli.

"Indeed, a case could be made for an inter-meeting easing, especially if the data soften further — although Fed officials might worry about how such a move could be (mis)interpreted."

SEEKING SAFE HARBOURS

Investors will get a read on employment in the service sector from the ISM non-manufacturing survey due later Monday and analysts are hoping for a rebound to 51.0 after June's unexpected slide to 48.8.

This week has earnings from industrial bellwether Caterpillar CAT.N and media giant Walt Disney DIS.N, which will give more insight into the state of the consumer and manufacturing. Also reporting are healthcare heavyweights such as weight-loss drugmaker Eli Lilly LLY.N.

The huge drop in Treasury yields had also overshadowed the U.S. dollar's usual safe-haven appeal and dragged the currency down around 1% on Friday =USD.

Early Monday, the dollar was off another 0.6% on the Japanese yen at 145.53 JPY=EBS, while the euro was holding firm at $1.0920 EUR=EBS.

The Swiss franc was a major beneficiary of the rush from risk, with the dollar near six-month lows at 0.8571 francs CHF=EBS.

"The shift in expected interest rate differentials against the U.S. has outweighed the deterioration in risk sentiment," said Jonas Goltermann, deputy chief markets economist at Capital Economics.

"If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets."

Investors had also increased wagers other major central banks would follow the Fed's lead and ease more aggressively, with the European Central Bank now seen cutting by 67 basis points by Christmas.

In commodity markets, gold pulled back to $2,421 an ounce XAU=, perhaps undermined by investors taking profits to cover losses elsewhere. GOL/

Oil prices bounced amid concerns about a widening conflict in the Middle East, though worries about demand had seen it sink to eight-month lows last week. O/R

Brent LCOc1 gained 27 cents to $77.08 a barrel, while U.S. crude CLc1 rose 23 cents to $73.75 per barrel.

Reporting by Wayne Cole; Editing by Stephen Coates

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