Asian Shares Going High Despite Interest Rate hikes and Inflation

Asian shares edged higher on Monday as a U.S. holiday slowed trading ahead of the latest Federal Reserve meeting minutes and a reading on core inflation, which could add to the risk of interest rates rising for longer.

Geopolitical tensions were high, with North Korea firing more missiles and talk of Russia stepping up attacks in Ukraine ahead of the one-year anniversary of the invasion on Friday.

All of which made for a cautious start and MSCI's broadest index of Asia-Pacific shares outside Japan nudged up 0.7 per cent, after sliding 2.2 per cent last week.

The bounce was led by Chinese blue chips which firmed 1.1 per cent as Beijing kept interest rates steady as expected, having already poured liquidity into the banking system in recent days.

Japan's Nikkei was flat, as South Korea added 0.3 per cent. EUROSTOXX 50 futures and FTSE futures both added 0.4 per cent, extending last week's gains.

S&P 500 futures barely budged, as did Nasdaq futures. The S&P touched a two-week low on Friday as a run of strong U.S. economic news suggested the Fed might have more to do on interest rates even after hiking a huge 450 basis points in 11 months.

"It's the most aggressive Fed tightening in decades and U.S. retail sales are at all-time highs; unemployment at 43-year lows; payrolls up over 500k in January and CPI/PPI inflation reaccelerating," noted analysts at BofA. "That's a Fed mission very much unaccomplished."

They warned the failure of the S&P 500 to break resistance at 4,200 could unleash a retreat to 3,800 by March 8.

Markets have steadily lifted the expected peak for Fed funds to 5.28 per cent, while sharply scaling back rate cuts for later this year and next.

Minutes of the Fed's latest meeting due on Wednesday should add colour on the deliberations, though they have been superseded somewhat by barnstorming numbers on January payrolls and retail sales.

The latter means figures on U.S. personal consumption expenditures (PCE) due this Friday are expected to show a 1.3 per cent jump in January, more than recovering from weakness in the prior two months.

The Fed's favoured inflation indicator, the core PCE index, is seen rising 0.4 per cent, the biggest gain in five months, while the annual pace may have slowed just a fraction to 4.3 per cent.

Goldman Sachs is tipping a rise of 0.55 per cent in the core, which would sorely test the market's resilience.

There are also at least five Fed presidents speaking this week, to provide running commentary.

Earnings season continues this week with major retailers Walmart and Home Depot set to offer updates on the health of the consumer.

Other firms reporting include chip company Nvidia, COVID-19 vaccine maker Moderna and e-commerce store front eBay.

The prospect of more Fed hikes 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 $1.0684, having touched a six-week low of $1.0613 on Friday, while the dollar was just off a two-month top on the yen at 134.20.

Investors are anxiously awaiting Friday's testimony from the newly nominated head of the Bank of Japan, and his thinking on the future of yield curve control (YCC) and super-easy monetary policy.

Any hint of an early end to YCC could see yields spike globally and send the yen surging, so analysts assume Kazuo Ueda will be careful not to spook markets.

Higher yields and a firmer dollar have not been good for gold, which was holding at $1,843 an ounce and not far from a five-week low of $1,807.

Oil prices were trying to rally, after shedding around 4 per cent last week amid signs of ample supply and concerns over future demand.

Brent edged up 58 cents to $83.58 a barrel, while U.S. crude rose 45 cents to $76.79.