SYDNEY, Feb 20 (Reuters) – Asian stocks were hesitant on Monday as the U.S. holiday slowed trading ahead of minutes from the Federal Reserve’s latest meeting and a reading of underlying inflation that could add to the risk of rising interest rates for longer.
Geopolitical tensions were still present with North Korea firing more missiles and talk of Russia stepping up its attacks in Ukraine ahead of the first anniversary of Friday’s invasion.
The White House was reportedly planning new sanctions against Russia, while Secretary of State Antony Blinken on Saturday warned Beijing of the consequences if it provided material support, including weapons, to Moscow.
All of this made for a cautious start and MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) rose 0.3%, after falling 2.2% last week. Japan’s Nikkei (.N225) was flat, as was South Korea’s (.KS11).
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Chinese blue chips (.CSI300) strengthened 0.9% as Beijing held interest rates steady as expected, having already injected liquidity into the banking system in recent days.
EUROSTOXX 50 and FTSE futures both added 0.3%, extending last week’s gains.
S&P 500 futures fell 0.1%, as did Nasdaq futures. The S&P hit a two-week low on Friday as a string of good US economic news suggested the Fed may have more to do on interest rates even after rising 450 basis points in 11 months.
“This is the most aggressive Fed tightening in decades and U.S. retail sales are at record highs; unemployment at a 43-year low; payrolls are up more than 500,000 in January and CPI/PPI inflation picks up,” BofA analysts noted. “It’s a very underachieving Fed mission.”
They warned that the S&P 500’s failure to break resistance at 4,200 could trigger a retreat to 3,800 by March 8.
Markets have steadily raised the expected peak in fed funds to 5.28%, while sharply reducing rate cuts for the end of this year and next.
MAIN PCE A RISK
Minutes from the Fed’s latest meeting scheduled for Wednesday should add color to the deliberations, although they were somewhat overtaken by January’s payroll and retail sales figures.
The latter means U.S. Personal Consumption Expenditure (PCE) numbers, due out on Friday, are expected to post a 1.3% jump in January, more than recovering from the weakness of the previous two months.
The Fed’s preferred gauge of inflation, the core PCE, is expected to rise 0.4%, the biggest gain in five months, while the annual pace may have slowed only once. fraction at 4.3%.
Goldman Sachs is expecting a 0.55% rise in the core, which would put a strain on the market’s resilience.
There are also at least five Fed chairs speaking this week, to provide ongoing commentary.
Earnings season continues this week with major retailers Walmart (WMT.N) and Home Depot (HD.N) ready to offer consumer health updates.
Other reporting companies include chip company Nvidia (NVDA.O), COVID-19 vaccine maker Moderna (MRNA.O) and eBay (EBAY.O).
The prospect of further Fed hikes lifted Treasury yields and generally supported the dollar, which hit a six-week high across a basket of currencies last week.
The euro was stuck at $1.0676, after hitting a six-week low of $1.0613 on Friday, while the dollar was just off a two-month high against the yen at 134.42.
Investors are eagerly awaiting Friday’s testimony from the new head of the Bank of Japan, and his thoughts on the future of yield curve control (YCC) and ultra-simple policy.
Any hint of an early end to YCC could see yields rise globally and drive the yen higher, so analysts assume Kazuo Ueda will be careful not to spook markets.
Higher yields and a stronger dollar have not been good for gold, which was struggling at $1,840 an ounce and not far off a five-week low of $1,807.
Oil prices were trying to stabilize after losing about 4% last week amid signs of ample supply and concerns about future demand.
Brent rose slightly 30 cents to $83.30 a barrel, while U.S. crude rose 21 cents to $76.55.
Reporting by Wayne Cole; Editing by Shri Navaratnam
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