Stocks guarded ahead of U.S. inflation test

Asian shares edged up on Monday as risk assets basked in the glow of the upbeat October payrolls report, though caution was warranted ahead of a reading on U.S. inflation that could spook the rate horses.

World shares steadied near record peaks on Monday as risk assets found support from an upbeat U.S. October payrolls report, but they face another test later in the week from a reading on U.S. inflation.

The congressional passage of a long-delayed U.S. $1 trillion infrastructure bill also cheered investors, though a broader social safety net plan remains elusive.

Data out over the weekend also showed Chinas exports beat forecasts in October to deliver a record trade surplus, although a miss on imports added to evidence of a slowing in domestic demand.

Moves were modest with the pan-European STOXX 600 benchmark was little changed in early trading, while the MSCIs broadest index of Asia-Pacific shares outside Japan was up 0.2%.

Nasdaq futures were off 0.2%, after 10 straight sessions of gains which left the index looking overextended. S&P 500 futures dipped less than 0.1%.

World shares were flat at 757.24 points by 0837 GMT after hitting a record high last week as relatively dovish central bank messages and the strong labour data in the United States added to optimism generated by a healthy earnings season on both sides of the Atlantic.

Fridays robust U.S. payrolls report included upward revisions to the previous couple of months and another strong reading on wages.

Tightness in the labour market combined with dislocation in global supply chains should result in another high reading for U.S. consumer prices due on Wednesday, with any upside surprise likely to rekindle talk of an earlier Federal Reserve hike.

Analysts note an alternative measure of core trimmed mean inflation has already picked up markedly to an annual 3.6%.

“Another acceleration in the monthly annualised trimmed CPI will reinforce our view that the Fed is behind the curve,” said Kim Mundy, a senior economist & currency strategist at CBA.

“The longer the FOMC waits to tighten monetary policy, the greater the risk the FOMC tightens more to bring inflation back under control.”

No less than six Fed officials are speaking on Monday, with the most attention likely on Vice Chair Richard Clarida who is talking on Fed and ECB policy.

After some wild swings, Treasuries still managed to end last week with a rally, thanks partly to a huge drop in UK bond yields where short-dated debt enjoyed its best week since 2009 after the Bank of England skipped a chance to hike.

That led the market to push out the likely timing and pace of tightening not just there, but in Europe and the United States too. Fed Funds now have a rate rise fully priced by September 2022, instead of July, a second not until February 2023 instead of December 2022.

Yields on 10-year Treasuries dived 10 basis points last week and were last up 2.4 bps at 1.48%.

The drop took a little steam out of the dollar, which had hit a more than one-year high after the payrolls data. The dollar index was up 0.1% at 94.359, down from a top of 94.634 hit on Friday.

Still, the BoE‘s shock decision left sterling down 1.4% over last week and on Monday it was down 0.3% at $1.3455, while the euro was down 0.1% at 1.1553 but up from last week’s 16-month trough.

The dollar was also trying to sustain its bull run on the Japanese yen at 113.52, above support around 113.25.

The retreat in bond yields was a boon for gold, which offers no fixed return, and lifted it to as high as $1,821.26 an ounce on Monday.

Oil prices firmed after the passage of the U.S. infrastructure bill supported the outlook for energy demand, while Saudi Arabias state-owned producer Aramco raised the official selling price for its crude.

Brent rose 0.81% to $83.42 a barrel, while U.S. crude gained 0.9% to $82.03.