Asian Shares Off to a Subdued Start Ahead of Fed Minutes

Asian shares got off to a subdued start on Monday as a U.S. holiday made for slow trading ahead of minutes of the last Federal Reserve meeting and a reading on core inflation that could add to the risk of interest rates heading higher for longer. Geopolitical tensions were also present, with North Korea firing more missiles and reports of Russia ramping up attacks in Ukraine before the first anniversary of the invasion.

MSCI’s broadest index of Asia-Pacific shares outside Japan was essentially flat after sliding 2.2% last week. Japan’s Nikkei dipped 0.2% and South Korea’s 0.4%. S&P 500 futures eased 0.2%, while Nasdaq futures lost 0.3%. The S&P touched a two-week low on Friday as vital U.S. economic news suggested the Fed might have more to do on interest rates even after hiking 450 basis points in 11 months.

Markets have steadily lifted the expected peak for Fed funds to 5.28% while sharply scaling back rate cuts for later this year and next. Minutes of the Fed’s last meeting due on Wednesday should add color to the deliberations, though they have been superseded somewhat by barnstorming numbers on January payrolls and retail sales.

Risk of Interest Rates Heading Higher for Longer

The prospect of higher interest rates for longer has lifted Treasury yields and generally supported the dollar, which hit a six-week top on a basket of currencies last week. The euro was stuck at $1.0676, having touched a six-week low of $1.0613 on Friday.

Analysts at Bank of America warned that U.S. retail sales are at all-time highs, unemployment at 43-year lows, payrolls are up over 500k in January, and CPI/PPI inflation is reaccelerating. This suggests that the Fed’s mission is still unaccomplished and that the failure of the S&P 500 to break resistance at 4,200 could lead to a retreat to 3,800 by March 8.

U.S. Personal Consumption Expenditures

Figures on U.S. personal consumption expenditures (PCE) due this Friday are expected to show a 1.3% jump in January, more than recovering from weakness in the prior two months. The Fed’s favored inflation indicator, the core PCE index, is seen rising 0.4%, the biggest gain in five months, while the annual pace may have slowed just a fraction to 4.3%.

Earnings Season Continues

Earnings season continues this week, with significant retailers Walmart and Home Depot set to offer consumer health updates. Other companies reporting include chip company Nvidia, COVID-19 vaccine maker Moderna, and e-commerce storefront eBay.

Related Facts

• MSCI’s broadest index of Asia-Pacific shares outside Japan was essentially flat after sliding 2.2% last week.
• The euro was stuck at $1.0676, having touched a six-week low of $1.0613 on Friday.
• Markets have steadily lifted the expected peak for Fed funds to 5.28% while sharply scaling back rate cuts for later this year and next.
• Figures on U.S. personal consumption expenditures (PCE) due this Friday are expected to show a 1.3% jump in January.
• The Fed’s favored inflation indicator, the core PCE index, is rising 0.4%, the biggest gain in five months.

Key Takeaways

• Asian shares got off to a subdued start on Monday as a U.S. holiday made for slow trading ahead of minutes of the last Federal Reserve meeting and a reading on core inflation.
• Geopolitical tensions were ever present, with North Korea firing more missiles and talk of Russia ramping up attacks in Ukraine before Friday’s first invasion anniversary.
• The prospect of higher interest rates for longer has lifted Treasury yields and generally supported the dollar.
• Earnings season continues this week, with significant retailers Walmart and Home Depot set to offer consumer health updates.

Conclusion

The minutes of the Fed’s last meeting, due on Wednesday, should add color to the deliberations. However, they have been superseded somewhat by barnstorming numbers on January payrolls and retail sales. With the prospect of higher interest rates for longer, the dollar has been supported, and the euro has been stuck at $1.0676. Earnings season continues this week with significant retailers Walmart and Home Depot set to offer updates on the consumer, which could provide further insight into the economy’s health.