Asian stocks rose higher on Monday as investors wondered if Wall Street can sustain its rally, as hopes that US inflation has peaked will be tested this week by likely aggressive commentary from the Federal Reserve.
“Wednesday’s FOMC minutes should reinforce the aggressive tone of recent Fed speakers that they are far from done with rates and inflation,” warned Tapas Strickland, an economics director at NAB.
Markets still give about a 50 percent chance that the Fed will raise 75 basis points in September and that yields will rise to about 3.50-3.75 percent by the end of the year.
Hopes for a soft economic landing are also getting a health check on US retail sales, which are expected to show a sharp slowdown in spending in July.
There is also a risk that revenues from major retailers, including Walmart and Target, will come with warnings of a slump in demand.
Asian markets have to navigate data on China’s retail sales and industrial production for July, expected later on Monday, which should show some improvement as coronavirus rules are eased.
However, previously published figures showed that new lending by banks in China fell more than expected in July.
Geopolitical risks also remain high with a delegation of US lawmakers in Taiwan for a two-day trip.
On Monday morning, the broadest MSCI index of Asia-Pacific stocks outside Japan rose 0.1 percent, after rising 0.9 percent last week.
Japan’s Nikkei rose 0.5 percent as data showed the economy grew at an annualized 2.2 percent in the second quarter, slightly below estimates.
S&P 500 futures and Nasdaq futures both fell about 0.2 percent. The S&P index is nearly 17 percent above its mid-June low and just 11 percent from all-time highs, amid bets that the worst inflation is over, at least in the United States.
“The leading indicators we observe support moderation with easing supply pressures, dwindling demand, money supply collapsing, falling prices and declining expectations,” BofA analysts said.
“Key components of headline inflation, including food and energy, are also at a turning point. Both Wall Street and Main Street now expect inflation to moderate.”
The bond market still seems doubtful that the Fed can deliver a soft landing, while the yield curve is still deeply inverted. The 2-year yield of 3.26 percent is 42 basis points higher than that for 10-year bonds.
Those returns have supported the US dollar, although it fell 0.8 percent against a basket of currencies last week as risk sentiment improved.
The euro held up at $1.0259, after jumping 0.8% last week, though it shied away from resistance around $1.0368. Against the yen, the dollar stabilized at 133.36 after losing 1 percent last week.
“We still feel that the dollar rally will resume in the foreseeable future,” said Jonas Goltermann, senior economist at Capital Economics.
“A lot more good news about inflation will be needed before the Fed changes tack. The minutes from the last FOMC meeting and the Jackson Hole conference could further push back the idea that the Fed is ‘rotating’.”
The slump in the dollar caused a sort of reprieve for gold, which rose to $1,799 an ounce after gaining 1 percent last week.
Oil prices fell early Monday with traders cautious in the event that progress was made on a possible European-brokered nuclear deal with Iran.
Brent fell 43 cents to $97.72, while US crude fell 36 cents to $91.73 a barrel.