Asia stocks brace for US inflation test, China data

Asian stock market: Asian share markets made a cautious start on Monday in a week where inflation figures could make or break hopes for earlier US rate cuts, while Chinese activity data will test optimism about a sustained recovery in the world's No. 2 economy.

Beijing has already reported a welcome pickup in inflation to an annual 0.3 per cent in April, helping to soothe worries about a slide into prolonged deflation. Forecasts favour further gains in April retail sales and industrial output due on Friday.

There are also reports Chinese authorities are laying the groundwork for a sale of 1 trillion yuan ($138.39 billion) in longer-dated bonds to help fund stimulus spending at home. The improved sentiment has helped lift Chinese blue chips (.CSI300) to a seven-month high. MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was flat, having hit its highest in more than 15 months last week.

Japan's Nikkei (.N225) eased 0.2 per cent, still saddled with speculation further losses for the yen could lead the Bank of Japan to raise rates in the next few months. Much now depends on whether the US April inflation report will show a moderation after three months of upside surprises. Median forecasts are for core consumer prices to rise 0.3 per cent in the month, compared to 0.4 per cent in March, pulling the annual rate down to 3.6 per cent.

So crucial are the data that rounding to the second decimal place could make all the difference. "Our unrounded core CPI forecast at 0.27 per cent m/m suggests larger risks for a dovish surprise to a rounded 0.2 per cent increase," noted analysts at TD Securities.

A low number would likely boost bets the Federal Reserve could ease as soon as July, which is currently priced at only a 25 per cent chance. Equally, a high inflation print could push a rate cut out past September and challenge pricing for 42 basis points of easing this year.

Also due are figures on US producer prices, retail sales and jobless claims, along with final reports on European inflation that should reinforce expectations for a June rate cut from the European Central Bank.

There are a host of Fed speakers this week to update markets on their thinking, including Fed Chair Jerome Powell who appears with the head of the Dutch central bank on Tuesday.

UPBEAT US EARNINGS

S&P 500 futures and Nasdaq futures were both little changed early on Monday, after rallying last week as company earnings came in strong. With 80 per cent of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8 per cent, well ahead of the April expectation of 5.1 per cent.

Once Nvidia (NVDA.O) reports on May 22, Magnificent Seven quarterly earnings are on track to jump 49 per cent, according to Tajinder Dhillon, senior research analyst at LSEG. Companies reporting this week include Walmart (WMT.N), Home Depot (HD.N) and Cisco (CSCO.O).

Global share indices have also bounced to record highs in recent weeks, even as markets have scaled back some of their more aggressive wagers for rate cuts this year.

"A straightforward interpretation of financial market performance is that there is more underlying strength in the global economy than had been anticipated and higher interest rates are reflecting rather than impeding global growth," says Bruce Kasman, head of economic research at JPMorgan.

"We lean in this direction as our 2024 growth and policy rate forecasts both move higher."

The relative outperformance of the US economy continues to underpin the dollar, while only the threat of Japanese intervention is stopping it from re-testing the 160 yen barrier.

The dollar was holding firm at 155.92 yen on Monday, while the euro was flat at $1.0770 having faced resistance around $1.0791 last week.

Gold stood at $2,362 an ounce , after rising 2.5 per cent last week on demand from momentum funds and talk of persistent buying by China.

Oil prices faded late last week as US gasoline and distillate inventories rose ahead of the start of the summer driving season.

Brent was down another 27 cents at $82.52 a barrel, while US crude dipped 21 cents to $78.05 per barrel.