Asian shares on guard for US, China inflation risks

SYDNEY: Asian share markets were in a cautious mood on Monday after a mixed U.S. jobs report sparked a rally in beaten-down bonds, but new hurdles lay ahead in the shape of U.S. and Chinese inflation figures due later this week.

MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was a fraction firmer in thin trade, after losing 2.3% last week.

Japan’s Nikkei (.N225) slipped 0.2%, but found support at its July low. A summary of the last Bank of Japan meeting showed members felt making yield policy more flexible would help extend the life of its super-easy stimulus.

Chinese blue chips (.CSI300) eased 0.7% with investors still disappointed at the lack of major and concrete stimulus steps from Beijing.

EUROSTOXX 50 futures dipped 0.3% and FTSE futures 0.5%. Going the other way, S&P 500 futures added 0.4% and Nasdaq futures 0.5%.

With roughly 90% of S&P 500 earnings reported, results are 4% better than consensus estimates with more than 79% of companies beating the Street. Results due this week include Walt Disney (DIS.N) and News Corp (NWSA.O).

Data on U.S. consumer prices are forecast to show headline inflation picking up slightly to an annual 3.3%, but the more important core rate is seen slowing to 4.7%.

Analysts at Goldman Sachs see a downside risk to the numbers in part due to falling car prices, an outcome that might help keep the bond rally alive and kicking.

In China, the market is looking for further signs of deflation with annual consumer prices seen down around 0.5%, and producer prices falling 4%.

Any upside surprises would be a test for Treasuries which steepened markedly early last week ahead of a flood of new borrowing. In the event, a mixed payrolls report helped reverse much of the losses, particularly at the short tend.

Futures imply only a 12% chance of a Federal Reserve rate hike in September, and 24% for a rise by year-end.

Michael Gapen, an economist at BofA, cautioned the market was still expecting too much policy easing next year given the recent run of resilient economic data.

“We now expect a soft landing for the U.S. economy, not the mild recession we had previously forecasted,” wrote Gapen.

“While the market implies between 120-160bps of Fed cuts in 2024 we look for only 75bps,” he added. “There’s simply less reason for the Fed to quickly pivot to rate cuts in 2024 when growth is positive and unemployment is low.”

As a result, the bank raised its year-end forecast for two-year and 10-year yields by 50 basis points to 4.75% and 4%, respectively.

On Monday, two-year yields were ticking higher again to 4.82%, with the 10-year up at 4.06%.

The pullback in yields took some steam out of the U.S. dollar, which was idling at 141.90 yen and short of last week’s top of 143.89.

The euro held at $1.0988 , having bounced from a trough of $1.0913 last week.

The dip in the dollar helped gold hold at $1,941 an ounce , after Friday’s rally from $1,928.90.

Oil prices paused having rallied for six straight weeks amid tightening supplies. The 17% climb in Brent combined with upward pressure on food prices from the war in Ukraine and global warming, is a threat to hopes for continued disinflation across the developed world.

Brent was up one cent at $86.25 a barrel, while U.S. crude gained 1 cent to $82.83.