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Fed, US GDP to keep Asia on edge this week

Events in the world's biggest economy will likely take center stage in Asia's financial markets this week, with the Federal Reserve's monetary policy decision and the U.S. second-quarter growth report card on tap.

"The key event is without dispute the FOMC [Federal Open Market Committee] decision on Wednesday. While almost no one is expecting the Fed to raise interest rates in its July meeting, everyone is watching for their comments, particularly on the economic and inflation outlook," IG's market strategist Bernard Aw wrote in a note released on Friday.

Aw believes that the world's most influential central bank is poised to raise rates from near zero this year, as U.S. jobs data improve and global risk events, namely Greece and China, subside. However, caution may be warranted with inflation remaining stubbornly lower than the central bank's targeted 2 percent rate.

"There are some concerns that the strengthening dollar is dampening inflationary pressure, which would cloud the Fed's judgement on when to raise rates. Nonetheless, Fed chair Yellen remains adamant that the central bank will start normalizing interest rates this year, although increases will be gradual," the Singapore-based strategist added.

The release of U.S. second-quarter gross domestic product (GDP) on Thursday will also be a key swing factor for risk appetite. According to economists polled by Reuters, the world's top economy likely grew 2.50 percent in the April-June period, regaining strength after expanding a meager 0.2 percent in the first three months of 2015 on the back of bad weather and softer energy prices.

A general view of the Federal Reserve Building in Washington, United States.
Samuel Corum | Anadolu Agency | Getty Images
A general view of the Federal Reserve Building in Washington, United States.

In Asia, a slew of economic data from the region's second-biggest economy will likely top the watch-list of investors, especially after the International Monetary Fund called on Japan to speed up structural reforms and prepare for further monetary easing.

Scheduled for release on Friday, the closely-monitored consumer price index (CPI) – which excludes volatile food prices – will likely be flat in June from a year ago, according to estimates from Moody's Analytics. This compares to a muted rise of 0.1 percent in the prior month and a 0.3 percent advance in April.

"Japan's inflation rate has weakened markedly as the effects of the April 2014 tax hike fade... The Bank of Japan (BOJ) may need to ease monetary policy further to reach its 2 percent inflation goal by mid-2016," Moody's analysts wrote in a note.

Also due on Friday, the jobless rate likely rose to 3.4 percent in June, Moody's estimated, a tick-up from 3.3 percent in the prior two months, as "labor demand wasn't strong enough to absorb new entrants" into the workforce.

Meanwhile, household spending – a key indicator of consumer sentiment – is expected to have risen 1.70 percent on-year last month, a Reuters poll said, down from 4.8 percent in May, which marked the first on-year increase in the data since the country increased its consumption tax last year.

Other Japanese data lined up for the week include June retail sales and industrial production due for release on Wednesday and Thursday, respectively.

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Elsewhere in the region, Australia releases its second-quarter trade report while South Korea will announce industrial production and retail sales figures for June.

Taiwan will be on GDP-watch, with second-quarter growth expected to soften. The economy likely expanded 2 percent year-on-year, according to estimates from Moody's Analytics, down from 3.4 percent in the March quarter as the persistent slowdown in China weigh on manufacturing sentiment and exports orders.

Meanwhile, Singapore braces for a barrage of corporate results this week, with the quarterly report cards from the city-state's biggest banks – Overseas-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) –, bourse operator Singapore Exchange (SGX), national carrier Singapore Airlines, real estate developer Yoma Strategic Holdings, shipbuilder Sembcorp Marine and Neptune Orient Lines (NOL) on tap.

Singapore's biggest lender DBS on Monday posted a better-than-expected 15 percent rise in second-quarter net profit, helped by higher interest rate margins.

Japanese firms like Canon, Sony, Honda and Nissan Motor as well as Samsung Electronics, the crown jewel of South Korea's biggest conglomerate, are also due to release quarterly earnings in the week ahead.