Asia shares enjoy calm before inflation test, investors hunker down

Asian stocks got the week off to a quiet start on Monday as a holiday in Japan removed one source of recent volatility, and investors hunkered down for major US and Chinese economic data for an update on global growth prospects.

Key for the Federal Reserve will be US consumer prices on Wednesday where economists look for rises of 0.2% in both the headline and core, with the annual core slowing a tick to 3.2%.

"That would likely bolster the Fed's confidence that disinflation is ongoing, allowing for a rate cut in September, but a core run-rate still above target should also speak against a larger 50bp cut or an intra-meeting cut," said analysts at Barclays in a note.

"Moreover, we expect a robust 0.8% m/m increase in headline retail sales, pointing to continued resilience in the engine of the economy, the consumer, on the back of solid income and wealth fundamentals."

As well as July retail sales, there is data on industrial output and housing starts, along with several surveys on regional manufacturing and consumer sentiment.

The futures market currently implies a 49% chance of the Fed cutting by 50 basis points in September, though that is down from 100% a week ago when Japanese equities went into free fall.

Early Monday, Nikkei futures traded at 35,370 compared to a cash close of 35,025. MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.2%.

S&P 500 futures and Nasdaq futures were little changed in thin trading. So far, around 91% of the S&P 500 have reported earnings and 78% of those have beaten the Street.

Results from Walmart and Home Depot this week will offer a snapshot on how US consumers are holding up.

China issues figures on retail sales and industrial production on Thursday, which are expected to show the economy continuing to underperform, underlining the need for more stimulus.

In currency markets, the dollar edged up 0.2% to 146.92 yen, and away from last week's deep low of 141.68, while the euro was steady at $1.0915.

BofA FX strategist Shusuke Yamada thinks the rush to unwind yen carry trades - borrowing at low rates to buy higher yielding assets - has mostly run its course with speculative yen short positions having fallen by 60%.

"Longer-term, structural outflows from corporate foreign direct investment and retail ownership of international equities should drive yen weakness," he adds, and sees the dollar at 155.00 yen by year-end.

Data from the IMM exchange showed net short positions in dollar/yen were down at 11,354 compared to 184,000 in early July.

In commodity markets, gold held at $2,420 an ounce, after dipping slightly last week. 

Oil prices inched up, having bounced 3.5% last week as fears of a widening Middle East conflict threatened supplies. 

Israeli Defense Minister Yoav Gallant spoke on Sunday with US Defense Secretary Lloyd Austin and told him Iran's military preparations suggest Iran is getting ready for a large-scale attack on Israel.

Brent gained 5 cents to $79.71 a barrel, while US crude rose 13 cents to $76.97 per barrel.