Asia in Wary Mood for US Inflation, Earnings Tests

SYDNEY, Australia (Reuters) – Asian shares edged higher cautiously on Monday as investors awaited a key reading of U.S. Inflation and the beginning of upcoming corporate earnings season.

The bond markets are still in a state of uncertainty after a recent sell-off that pushed yields up to multi-year-highs throughout the developed world. This made equities look less attractive.

The rise in yields has put pressure on carry trades, which have seen the Japanese yen surge sharply in late last week at the expense of U.S. dollars.

Early trade saw MSCI's broadest Asia-Pacific share index outside Japan rise 0.1% against an uncertain backdrop.

South Korea's Nikkei added 0.1%, while Japan's Nikkei gained 0.3%.

S&P futures and Nasdaq Futures both remained unchanged, after a modest decline last week.

The earnings season begins this week, with JPMorgan Chase, Citigroup and State Street among those reporting.

Goldman Sachs analysts noted that "Consensus" expects S&P 500 earnings per share to decline by 9% annually due to flat sales growth.

They added, "We expect that companies will be able meet the low standard set by consensus." "Negative earnings per share (EPS) revisions for the years 2023 and 2024 have appeared to bottom out and the revision sentiment has improved."

This week, there will also be major data about U.S. Consumer Prices. It is expected that headline inflation will slow to its lowest since early 2021 of 3.1% and the core to 5.0%.

The Federal Reserve will likely raise rates in the second half of this month. However, a low CPI could reduce the likelihood that the Fed makes another move.

Futures indicate that there is a 90% chance of an increase to 5,25-5,5% in this month and a 25% chance of one in September.

Fed officials have mostly been hawkish with their communications. Markets have also priced higher rates in Europe, and the UK. Markets indicate that there is a 67% probability of a second rate hike when Canada's central banks meets this week.

Bond markets have been ravaged by the risk of global rates rising for longer. U.S. yields on 10-year bonds jumped 23 basis point last week. German yields increased 24 basis points, and UK yields increased 26 basis points.

The yields on U.S. 2-year bonds were 4.946% early Monday morning, after reaching a 16-year-high of 5.12% the previous week.

Carry trades, where investors borrow super-low interest rates of yen to invest in high-yielding currencies from emerging markets, were affected by the jump in yields in developed countries.

In the end, the yen rose across the board as a result of a rush to cover short positions. After a 1.3% decline on Friday, the dollar was at 142.30yen. The euro was at 155.96yen. The dollar was stable at $1.0962.

The peso fell 1.8% against the yen in Friday's shakeout.

Gold was stable at $1,923 per ounce on the commodity markets after a small gain last week. [GOL/]

Early trade saw oil prices drop after reaching nine-week highs the previous week, as Saudi Arabia and Russia announced new output cuts. [O/R]

Brent crude oil fell 35 cents, to $78.12 per barrel. U.S. crude dropped 40 cents, to $73.46.