Asian shares took a downward turn on Monday as investors braced themselves for crucial US inflation and retail sales data, which could have a major impact on the global outlook for interest rates.
This follows a spike in bond yields that has raised concerns among investors. To add to the uncertainty, news of the US Air Force shooting down a flying object near the Canadian border only added to the air of geopolitical mystery.
The officials declined to comment whether the object was similar to the large white Chinese balloon shot down earlier this month.
The MSCI’s broadest index of Asia-Pacific shares outside Japan declined by 0.1% after losing 2.2% last week. Other markets including Japan’s Nikkei and South Korea also fell by 0.5% and 0.3%, respectively. S&P 500 futures were down 0.2%, and Nasdaq futures dipped 0.3%.
The direction of assets in the near term could well be determined by the US inflation and retail sales data this week, which could either slow or accelerate the recent rise in bond yields. Forecasts suggest a rise of 0.4% in headline and core consumer prices, with sales rebounding by 1.6%.
However, there is a risk of upward revision as a re-analysis of seasonal factors saw upward revisions to CPI in December and November, lifting core inflation to 4.3% from 3.1%.
Bruce Kasman, head of economic analysis at JPMorgan, expects core CPI to rise by 0.5% and sales to jump 2.2%. He believes that the recent tightening of labor markets in developed markets, along with the latest news, reinforces the conviction that a recession will eventually be necessary to bring inflation back to central bank comfort zones.
With a full slate of Fed officials speaking this week, the markets are likely to get a timely reaction to the data. Yields on 10-year Treasuries are at five-week highs of 3.75% after jumping 21 basis points last week, while two-year yields hit 4.51%.
The shift in yields has stabilized the dollar, especially against the euro, which slipped 1.1% last week to $1.0670.
The rise in yields and the dollar has put pressure on gold prices, which have been stuck at $1,862 an ounce compared to its early February peak of $1,959.
Meanwhile, oil prices have eased a bit after jumping on Friday when Russia announced plans to cut its daily output by 5% in March. Brent dipped 36 cents to $86.03 a barrel, while U.S. crude fell 35 cents to $79.37.
