Asian stock markets rose cautiously on Monday on hopes that headline US inflation would show some cooling, while the US dollar was weighed down by the risk of interest rate hikes in Europe and Japanese intervention.
Holidays in China and South Korea led to slow trading, while traders were uncertain about the implications of Ukraine’s surprising success against Russian troops.
MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.2%, rebounding modestly from a two-year low hit last week. Japan’s Nikkei added another 0.9% after rising 2% last week.
Wall Street looked to extend Friday’s rally, with S&P 500 futures up 0.1%, while Nasdaq futures rose 0.2%.
Bulls hope that Tuesday’s US consumer price reading will point to a peak in inflation, as a drop in gasoline prices will drag the headline index down 0.1%.
The base rate is forecast to rise 0.3%, although some analysts see a softer report likely.
“It’s safe to say that with the economy contracting in the first half of the year and household capacity under significant pressure, we expect a modest decline,” Westpac economists said.
“Therefore, we forecast +0.2% for the main and -0.2% for the headline,” they added. “However, if this is achieved, do not expect a repeat in October and beyond, and volatility is likely to persist.”
The soft number could revive speculation that the Federal Reserve will hike by just 50 basis points this month, though it would likely have to be very weak to have any real impact given how hawkish policymakers have been recently.
The market currently predicts an 88% chance of a 75 basis point Fed hike.
BofA global economist Ethan Harris worries that central banks may go too far in focusing on actual inflation to determine when to stop. The bank raised the target rate on federal funds to a range of 4.0-4.25%, an increase of 75 bps. in September and a smaller increase after that.
“For investors, this means more pressure on interest rates, weaker risk assets and continued growth in the super-strong dollar,” Harris said.
“In our view, these trends only turn around when markets are pricing in more central bank growth, and we haven’t seen that yet.”
DOLLAR NOT MADE YET
For now, the dollar has taken some gains from the market, which is very long the currency after a month of steady growth.
The dollar has risen so quickly against the yen that Japanese authorities are increasingly protesting against their currency’s slide, prompting speculation of intervention and putting pressure on the Bank of Japan to ease its yield curve control policy.
Japan’s government must take the necessary measures to counter an excessive fall in the yen, a senior government official said on Sunday, after the yen hit a 24-year low against the dollar.
This was enough for the dollar to stay at 142.67 yen, leaving it from last week’s high of 144.99.
The dollar index stood at 108.820, having reached 110.790 last week.
The euro rose to $1.0067, off a recent low of $0.9865.
That was helped in part by a Reuters report that European Central Bank policymakers see a growing risk that they will have to raise their key interest rate to 2% or more to contain record high inflation despite a likely recession.
Analysts at ANZ noted that the dollar has gained about 9% against the euro and the Chinese yuan, 12% against the British pound and 19% against the yen over the past month.
“The dollar’s fearless exchange rate is causing tension in developing countries, for which dollar-denominated imports are becoming more expensive,” the note said.
“With Fed speakers taking every opportunity to deliver a dovish message and quantitative tightening looming, the US dollar is not going to turn sharply.”
A stronger dollar, combined with high bond yields, was a drag on gold, which was trading at $1,718 an ounce after hitting a low of $1,690 last week.
Oil prices also fell on worries about a global economic slowdown, although supply cuts led to a 4% rebound on Friday.
Brent was down 36 cents at $92.48 on Monday morning, while U.S. crude was down 45 cents at $86.34 a barrel.
