JAPAN shares were in a cautious mood yesterday as investors braced for an event-packed week headlined by U.S. inflation data and the first House testimony by the new head of the U.S. Federal Reserve.

Sentiment was fragile with the dollar losing early gains and safe-haven bonds firming as E-Mini futures for the S&P 500 turned 0.1 percent lower.

Japan’s Nikkei led with an increase of 0.7 percent, pulling back from early gains of 1.2 percent, but Chinese blue chips slipped 0.5 percent.

Investors initially took heart from Friday’s rally on Wall Street which saw the VIX volatility index end at 16.49 percent, far below the 50 percent peak touched at the height of market turmoil in early February.

The mood has calmed partly thanks to expectations the Federal Reserve will stay gradual in its tightening, a measured outlook underlined by the central bank in a governors’ report released Friday.

Investors also seem to be wagering that the U.S. Fed Chairman Jerome Powell will stick to that script at his first appearance before the House on Feb. 27, followed by testimony to the Senate Thursday.

“Powell will be highly cognizant of the spike in risk aversion in late January and will be keen not to rock the boat too greatly,” argued Chris Weston, chief market strategist at broker IG.

“Futures markets on Friday were pricing in less implied policy tightening from the Fed in the years ahead, suggesting traders are not expecting Powell to signal a more aggressive response.”

Yields on U.S. 10-year Treasuries had also backed off to 2.85 percent and away from a four-year top of 2.957 percent.

An added wrinkle is that the Fed’s favored measure of inflation, the core personal consumption expenditure index, is out early Thursday.

Markets will be hyper-sensitive to any hint of a pick-up in core inflation given the surprising strength of wages in January, and Powell is certain to be questioned on the risks by Senators.

In currency markets, the U.S. dollar surrendered early gains to dip 0.1 percent on a basket of currencies to 89.796. That followed a 0.8 percent bounce last week.

It also retreated on the yen to reach 106.61, failing to hold an early 107.28 top.

The euro was hovering at US$1.2305 and just above last week’s trough at US$1.2258.

(SD-Agencies)