Asia shares open gingerly on U.S. inflation, earnings season

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SYDNEY — Asian shares started cautiously on Monday as investors braced for a U.S. inflation report that could force another super-sized hike in interest rates, and the start of an earnings season where profits could be under pressure.

An upbeat U.S. June payrolls report already has the market wagering heavily on a hike of 75 basis points from the Federal Reserve this month, and sending bond yields higher.

Underlining the global nature of the inflation problem, central banks in Canada and New Zealand are expected to tighten further this week.

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While Wall Street did eke out some gains last week the market mood will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the day after.

“Consensus expects 2Q S&P 500 EPS growth of just +6% year/year,” says Goldman Sachs analyst David J. Kostin. “While firms will likely clear this low bar, we expect cautious commentary will prompt cuts to forward estimates.”

If the economy does manage to dodge recession, Kostin sees EPS growth of 8% in 2022 and 6% in 2023, with the S&P 500 index rising to 4300. In a moderate recession, EPS could fall by 11%.

Early Monday, S&P 500 futures were down 0.2% and Nasdaq futures off 0.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan hovered around flat. South Korea eased 0.3%, but Japan’s Nikkei added 1.5%.

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Japan’s conservative coalition government was projected to have increased its majority in upper house elections on Sunday, two days after the assassination of former prime minister Shinzo Abe.

A major hurdle will be Wednesday’s U.S. consumer price report where markets see headline inflation accelerating further to 8.8%, but a slight slowdown in the core measure to 5.8%.

An early reading on consumer inflation expectations this week will also have the close attention of the Fed.

“Unexpected weakness in these releases will be required to dislodge expectations for a 75bps July 27 Fed rate rise, which lifted from about 71bps to 74bps post the payrolls report,” said Ray Attrill head of FX strategy at NAB.

PARITY PARTY

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Likewise, Treasury yields climbed around 10 basis points on the jobs report and the 10-year stood at 3.08% on Monday up from a recent low of 2.746%.

A hawkish Fed combined with fears of recession, particularly in Europe, has kept the dollar up at 20-year highs against a basket of competitors. The dollar was firm at 136.30 yen , just off its recent peak of 137.00.

The euro continued to struggle at $1.0164, having shed 2.4% last week to hit a two-decade low and major retracement target at $1.0072.

“With little economic relief on the horizon for Europe, and U.S. inflation data likely to mark a new high for the year and keep the Fed hiking aggressively, we think the risks remain skewed in favor of the greenback,” said Jonas Goltermann, a senior markets economist at Capital Economics.

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“Indeed, we think the EUR/USD rate will break through parity before long, and may well trade some way through that level.”

Rising interest rates and a strong dollar have been a headache for non-yielding gold, which was ailing at $1,742 an ounce having fallen for four weeks in a row.

Oil prices also lost around 4% last week as worries about demand offset supply constraints.

Data from China due Friday are likely to confirm the world’s second-largest economy contracted sharply in the second quarter amid coronavirus lockdowns.

On Monday, Brent was trading 12 cents lower at $106.90, while U.S. crude eased 34 cents to $104.45 per barrel.

(Reporting by Wayne Cole; Editing by Kenneth Maxwell)