SYDNEY – Asian stocks opened cautiously on Monday as U.S. earnings season gets into full swing, while a raft of Chinese data will offer insight into how the world’s second-largest economy is recovering.
Markets have also seen a mood shift on the outlook for U.S. interest rates, with futures implying an 80-percent chance the Federal Reserve will hike by a quarter point to 5 -5.25 percent in May.
Solid US jobs data keeps Fed on track for rate hike in May
Resilience in core U.S. retail sales and a jump in inflation expectations reported on Friday led investors to trim the amount of easing expected later this year to around 60 basis points (bp).
“Early April data on the labor market, inflation and consumption all indicate the Fed has more work to do and that a soft or bumpy landing is a greater probability than a sharp and relatively sudden contraction in activity,” said analysts at ANZ in a note.
“Our baseline view is for two more 25 bp hikes and, if data does not start to weaken soon, the market will need to reprice for no rate cuts in the second half of this year.”
At least eight top Fed officials are speaking this week, including three governors, and could generate plenty of headlines to move the dial further.
This combination of factors made for a slow start on Monday and MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1 percent, while Japan’s Nikkei inched up 0.3 percent.
Chinese data on retail sales, industrial output and gross domestic product are due on Tuesday, and analysts suspect the risks are for an upside surprise given recent strength in trade. Figures out over the weekend showed new home prices climbing at the fastest pace in 21 months, supporting consumer demand and confidence.
Eyes on earnings outlook
S&P 500 futures edged up 0.2 percent, while Nasdaq futures were flat as investors awaited a slew of earnings reports led by Goldman Sachs, Morgan Stanley and Bank of America.
Other big names reporting earnings include Johnson & Johnson, Netflix and Tesla.
Analysts expect Q1 S&P 500 earnings to fall 5.2 percent from the year-ago period, though BofA analyst Savita Subramanian is more concerned about the outlook for 2023.
“Overall, we expect an in-line quarter, but big cuts for the full-year,” BofA warned. “Our 2023 EPS estimate for the S&P 500 remains $200, still 9 percent below consensus estimates.”
“Demand for consumer goods has already softened and now we’re watching services,” said Subramanian. “Airlines, hotels and restaurants are feeling pressure from slowing macro, tough comps (comparison periods) and no respite from wage pressure.”
In bond markets, the shift in Fed expectations pushed U.S. two-year yields up to 4.12 percent, having risen 12 basis points last week.
Yet, the outlook has also turned more hawkish on the European Central Bank (ECB), sending German two-year yields surging 33 basis points over the week for the biggest increase since September.
Futures have 37 basis points of ECB tightening priced for the May meeting and 82 basis points by December.
That sea change saw the euro gain 0.8 percent last week, even after a dip on Friday. Early Monday, the single currency was holding at $1.0983 having hit a one-year high of $1.1075 last week.
The dollar has fared better on the yen as the Bank of Japan remains committed to its super-easy monetary policy, at least for now. That kept the dollar at 133.96 yen, after rallying 1.2 percent last week.
The bounce in the dollar took some of the shine off gold which was back at $2,002 an ounce, off last week’s peak above $2,048.
Oil prices have enjoyed four straight weeks of gains, helped by cuts to output and as the West’s energy watchdog said global demand will climb to a record this year on the back of a recovery in Chinese consumption.
The market was consolidating on Monday with Brent up 6 cents at $86.37 a barrel, while U.S. crude rose 1 cent to $82.53.