Asian shares inch up as inflation dips in China

Sydney — Asian share markets edged cautiously higher on Monday as investors looked ahead to a key reading on US inflation and the start of another corporate earnings season.

Chinese consumer price figures surprised on the soft side with inflation falling in June and essentially unchanged from a year before.

The miss implies there is much scope to ease monetary policy further, but also underlines the challenge Beijing faces in reflating its economy and avoiding a deflationary spiral.

The yuan pared early gains on the news, though Chinese blue chips were still up 0.7% on hopes for a loosening in regulations for the tech sector. Shares in Hong Kong’s Alibaba Group also joined the rally.

The gains in China helped MSCI’s broadest index of Asia-Pacific shares outside Japan firm 0.6%. Japan’s Nikkei eased 0.7% in the wake of a higher yen, while South Korea added 0.2%.

Euro Stoxx 50 futures dipped 0.1% while FTSE futures held steady. S&P 500 futures and Nasdaq futures both dipped 0.2%, adding to last week’s losses.

Earnings season starts later this week with JPMorgan Chase, Citigroup, Wells Fargo, State Street and PepsiCo among the names reporting.

“Consensus expects a 9% year-on-year decline in S&P 500 [earnings per share (EPS)] driven by flat sales growth and margin compression,” noted analysts at Goldman Sachs.

“We expect companies will be able to meet the low bar set by consensus,” they added. “Negative EPS revisions for 2023 and 2024 appear to have bottomed and revision sentiment has improved.”

This week also has major data on US consumer prices, which is forecast to show headline inflation slowed to its lowest level since early 2021 at 3.1%, with the core easing to 5.0%.

Markets still think the Federal Reserve is likely to hike rates later this month, but a weak CPI might lessen the risk of yet a further move in September.

Futures imply about a 90% probability of a rise to 5.25%-5.5% this month, and a 24% chance of a move in September.

Fed officials have been mostly hawkish in their communications, while markets have also priced in higher rates in Europe and the UK. Canada’s central bank meets this week and markets imply a 67% chance of another hike.

The risk of higher global rates for longer has caused havoc in bond markets, where US 10-year yields jumped 23 basis points last week, German yields 24 basis points and UK yields 26 basis points.

Early on Monday, US two-year yields stood at 4.957%, having hit a 16-year high of 5.12% last week.

The jump in developed-world yields caused ripples in currency markets, particularly in carry trades where investors borrow yen at super-low rates to invest in high-yielding emerging market currencies.

The net result was a rush to close yen short positions which caused the Japanese currency to rally across the board last week.

The dollar was a shade firmer on Monday at ¥142.46, after sliding 1.3% on Friday, while the euro held at ¥156.18. The single currency was also firm on the dollar at $1.0960.

One of the most popular carry trades has been short yen and long Mexican peso, and the shake-out caused the peso to dive 1.8% on the yen on Friday.

In commodity markets, gold was steady at $1,924 an ounce after making a slight gain last week.

Oil prices eased slightly, having touched nine-week highs last week as top exporters Saudi Arabia and Russia announced fresh output cuts.

Brent fell 15c to $78.32 a barrel, while US crude lost 26c to $73.60.

Reuters