Stocks wary of US inflation and earnings tests

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SYDNEY — Asian stocks were mostly underwater on Monday as investors braced for a U.S. inflation report that could force another interest rate hike and the start of an earnings season during which profits could be under pressure.

An upbeat report on US payrolls in June has already had the market betting on a 75 basis point hike from the Federal Reserve, pushing bond yields and the dollar higher.

Underscoring the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten further this week.

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While Wall Street made some gains last week, market sentiment will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the next day.

“Consensus expects S&P 500 EPS (earnings per share) growth in the second quarter of only +6% per annum,” said David J. Kostin, analyst at Goldman Sachs. “While companies are likely to breach this low bar, we expect cautious commentary to prompt lower forward estimates.”

If the economy manages to dodge the recession, Kostin predicts EPS growth of 8% in 2022 and 6% in 2023, with the S&P 500 index rising to 4,300. In a moderate recession, EPS could drop 11% .

On Monday, S&P 500 futures were down 0.4% and Nasdaq futures were down 0.5%. EUROSTOXX 50 futures fell 0.6% and FTSE futures fell 0.7%.

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Chinese blue chips lost 1.2% after Shanghai discovered a case of COVID-19 involving a new subvariant, Omicron BA.5.2.1.

MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 0.7%. In the other direction, South Korea strengthened 0.1% and the Japanese Nikkei gained 1.6%.

Japan’s conservative coalition government is expected to have increased its majority in upper house elections on Sunday, two days after the assassination of former Prime Minister Shinzo Abe.

A major headwind will be Wednesday’s US consumer price report, in which markets see headline inflation accelerating to 8.8%, but a slight slowdown in the base measure to 5.8. %.

A first reading on consumer inflation expectations this week will also hold the Fed’s attention.

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“Unexpected weakness in these releases will be needed to dislodge expectations of a 75 basis point Fed rate hike on July 27, which fell from around 71 basis points to 74 basis points after the report on payroll, » said Ray Attrill, head of FX strategy at NAB.

PARITY PARTY

Similarly, Treasury yields climbed about 10 basis points on the jobs report and the 10-year settled at 3.09% on Monday, from a recent low of 2.746%.

A hawkish Fed combined with recession fears, particularly in Europe, kept the dollar at 20-year highs against a basket of competitors. The dollar broke above 137.00 to hit its highest since 1998 at 137.10 yen as the Bank of Japan remained dovish.

The euro continued to struggle at $1.0140, after losing 2.4% last week to hit a two-decade low and a major retracement target at $1.0072.

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“With little economic relief on the horizon for Europe and US inflation data likely to mark a new high for the year and keep the Fed aggressively higher, we believe risks remain biased in favor greenback, » said Jonas Goltermann, a senior market economist at Capital Economics.

« Indeed, we believe that the EUR/USD rate will cross parity soon, and could well trade down to this level. »

Rising interest rates and a strong dollar were a headache for non-performing gold, which was hurting at $1,740 an ounce after falling for four straight weeks.

Oil prices also fell around 4% last week as demand concerns offset supply constraints.

Data from China due Friday is expected to confirm that the world’s second-largest economy contracted sharply in the second quarter amid a coronavirus lockdown.

On Monday, Brent was trading down 72 cents at $106.30, while U.S. crude was down 89 cents at $103.90 a barrel.

(Reporting by Wayne Cole; Editing by Kenneth Maxwell and Bradley Perrett)