GLOBAL MARKETS-Asian shares cautious as Fed raises interest rates warning

GLOBAL MARKETS-Asian shares cautious as Fed raises interest rates warning

SYDNEY Reuters- Asian shares were cautious on Friday after U.S. Federal ReserveFederal Reserve officials fired more warnings on interest rates, while rising coronaviruses cases in China and liquidity strains in its bond market added to uncertainty.

The dollar and bond yields were higher overnight when St. Louis Fed President James Bullard said interest rates might need to hit a range from 5% to 7% to curb inflation.

It was a blow to investors who had been wagering that rates would peak at 5% and saw Fed fund futures sell off as markets priced in more chance that rates would now top out at 5 -- 5.25%, rather than 4.75 -- 5.0%.

Two-year yields went up to 4.46% last week, a rebound from a 33 basis point drop of 33 basis points to a low of 4.29%. That left them 69 basis points above 10 year yields, the largest inversion since 1981. Brian Daingerfield, an analyst at NatWest Markets, said the message was about the desire of the Fed to lean against what they would consider a premature loosening of financial conditions. The message was received on that front. The Fed seems to be focused on over-signalling on the tightening front and hoping that the data slows to a point where they can have the flexibility to undershoot. Wall Street wanted to hear that the bond market's warnings of the recession were not what Wall Street wanted to hear, so they left S&P 500 futures flat on Friday, while Nasdaq futures went up 0.1%.

After slipping for two sessions, the broadest index of Asia-Pacific shares outside Japan bounced back 0.6%.

There were concerns that a surge in COVID 19 cases in China would challenge plans to loosen strict movement curbs that have throttled the economy.

Japan's Nikkei was up 0.2%. Inflation went up to a 40 year high as the yen stoked import costs.

The Bank of Japan argues that inflation is mainly driven by energy costs outside of its control and that the economy needs to continue super-easy policies.

The situation was radically different in Britain, where finance minister Jeremy Hunt announced tax rises and spending cuts in an effort to assure markets that the government is serious about fighting inflation.

The week saw sterling at $1.1890, off the week's high of $1.2026, leading to dire predictions that the economy was already in a recession.

A three month trough of 105.30 touched early in the week added to a broad bounce in the dollar, which reached 106.70 on a basket of currencies.

The dollar was up to 140.20 yen, away from its recent low of 137.67, but faced resistance around 140.70 80.

The euro was trading at $1.0368 after a four month peak of $1.0481 hit on Tuesday. Some policy makers argued for caution on tightening.

Economist Christine Lagarde will give a keynote speech on Friday that may give guidance on how the majority at the bank may lean.