Wayne Cole

SYDNEY – Asian shares were muted on Monday, as the market awaited a negative reading on U.S. inflation. However, the euro gained on the yen due to bets that the European Central Bank will make a big step towards policy tightening next week.

After Saudi Arabia’s sharp increase in crude oil prices in July, the early trading session saw oil prices jump. It is a clear indicator of how tight supplies are, even after OPEC+ committed to accelerating its output growth over the coming two months.

MSCI’s Asia-Pacific share index outside Japan fell 0.1% while it slipped 0.3%. Both Nasdaq and MSCI futures edged up 0.1%.

The U.S. Consumer Price Report on Friday will have markets on edge, particularly after the shock of EU inflation last week.

The forecasts predict a sharp rise in inflation of 0.7% for May. However, the annual rate is expected to hold at 8.3% and core inflation will slow down to 5.9%.

This would increase the expectation of tightening aggressively by the Federal Reserve. Markets already price in half-point increases in June and July, and nearly 200 basis points at the end of this year.

Analysts believed Friday’s positive payrolls report indicated that the Fed is on track to a soft landing.

“May’s numbers came in about as good as the Fed could expect,” said Jonathan Millar, an economist at Barclays (LON:).

“It’s a good sign that the Fed’s plans to cool the labour market are playing out favourably so far, with solid gains in employment continuing to generate steady income gains that will help allay recession worries, for the time being.”

HINT: NOT SO NEGATIVE

When the European Central Bank meets Thursday, President Christine Lagarde will likely confirm an end in bond buying for this month. She also expects a first rate rise in July. But it’s still uncertain if it will be 25 basis points or 50 basis points.

The money markets have a price for 125 bps hikes per year, 100 bps in October.

Analyst at NAB stated that ECB officials recently communicated the intention to increase rates 25bp at July and September in order to end negative rates before the end of Q3. However, some members would prefer to keep the doors open to bigger 50bp hikes. “Lagarde’s press conference after the meeting will be closely monitored.”

Although the prospect that rates will turn positive in 2015 has kept the euro at $1.0722 (a significant improvement on its previous low of $1.0348), it still faces resistance of around $1.0786.

Also, the euro hit a seven year high on the Japanese yen, at 140.35. It had climbed 2.9% last Week, and the dollar was higher at 130.84yen, also having gained 2.9%.

After a 0.4% increase last week, the dollar was at 102.110 against a basket currency.

Gold was steady at $1,852 per ounce in commodity markets after it held within a narrow range over the last few weeks. [GOL/]

Saudi Arabia raised the price of oil shipments to Asia. Investors are betting that supply will be insufficient to satisfy demand, especially since China has begun to relax its restrictions. [O/R]

Vivek Dahar, a CBA analyst in mining and energy said “Perhaps only a quarter to half of what OPEC+ promises will come online over these next two months.”

While that price increase is urgently needed, it does not meet demand growth expectations. This is especially true when you consider the EU’s partial ban of Russian oil imports. There are upside risks for our $US110/bbl near term price projection.

Brent has already risen $1.61 to $120.33 per barrel, adding $1.61 Monday. The barrel price rose $1.56 more to $120.43.