TOKYO (AP) — Asian shares edged higher Thursday, cheered by a stronger than expected reading on U.S. retail sales that set off a rally on Wall Street.

In the latest data on the regional economy, Japan’s trade deficit reached a record 3.497 trillion yen ($26.2 billion) in January. Imports for the world’s third largest economy jumped amid higher raw material and energy costs, and a weak yen. Exports rose 3.5%.

Japan’s benchmark Nikkei 225 gained 0.7% in morning trading to 27,705.72. Australia’s S&P/ASX 200 rose 0.7% to 7,406.70. South Korea’s Kospi jumped 1.7% to 2,469.63. Hong Kong’s Hang Seng surged 2.1% to 21,241.94, while the Shanghai Composite added 0.7% to 3,304.77.

“Asian equities were higher on Thursday after a positive day on Wall Street, where price action was driven by strong retail sales in the US, which signaled a hot economy at the start of the year,” Anderson Alves at ActivTrades said in a report.

Japanese machinery orders for December returned to growth after contracting in the previous month.

The total value of machinery orders received by 280 manufacturers in Japan, a key indicator for private sector investment, rose a seasonally adjusted 6.5% in December from the month before.

On Wall Street, the S&P 500 rose 0.3% to 4,417.60 after swinging from early losses to gains through the day. The Dow Jones Industrial Average added 0.1% to 34,128.05, while the Nasdaq composite rose a more forceful 0.9% to 12,070.59.

Sales at U.S. retailers jumped by more last month than expected, even as shoppers contended with higher interest rates on credit cards and other loans. The surprising strength offers hope that the most important part of the U.S. economy, consumer spending, will remain resilient despite worries about a possible recession. It’s the latest piece of data to show the economy remains stronger than feared.

At the same time, though, the strong demand could add more fuel to inflation, leading the Federal Reserve to keep interest rates high. A report earlier this week showed prices are cooling less than expected.

“Will it lead to that traditional recession or a shallow recession, or will we power through it and have more strong growth with still-high rates?” asked Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.”

“It seems like both consumers and corporate America came into this in pretty good shape and so far are holding out OK,” he said.

After Tuesday’s data on inflation was slightly hotter than expected, economists at Deutsche Bank raised their forecast for how high the Fed will take its key overnight interest rate. They now see it ultimately rising to 5.6%, up from their prior forecast of 5.1%.

The Fed has already pulled its overnight rate all the way to a range of 4.50% to 4.75%, up from virtually zero a year ago.

The Deutsche Bank economists said they still expect a recession, but that the near-term strength in the economy could push its timing into the last three months of the year, later than they earlier thought.

Many other traders have also been raising their forecasts for how high the Fed will ultimately take interest rates. They’ve also sharply reduced bets for the Fed to cut rates late this year.

Even still, stocks are hanging onto healthy gains for the year despite recent rockiness. The S&P 500 is up 8% as strong data build hope that the economy may be able to avoid a recession. Or, if one hits, perhaps it may be only a short and shallow one.

The next big milestone for the market will likely be the Fed’s meeting in late March, when policy makers will give their latest forecasts for where interest rates will be at the end of the year, Hainlin said. That could lead to choppy trading in markets until then, as investors try to guess which way it will go.

On Wall Street, shares of Airbnb jumped 13.4% Wednesday after reporting stronger profit and revenue for its latest quarter than analysts expected. On the losing end were stocks of energy producers, which fell 1.8% for the worst performance by far of the 11 sectors that make up the S&P 500.

One of the sharpest drops came from Devon Energy, which fell 10.5% after reporting weaker profit for the latest quarter than expected.

This earnings reporting season has been muted, with many companies reporting pressure on their profits from higher costs and interest rates.

In energy trading, benchmark U.S. crude added 43 cents to $79.02 a barrel in electronic trading on the New York Mercantile Exchange. It fell 47 cents to $78.59 on Wednesday. Brent crude, the international pricing standard, rose 38 cents to $85.76 a barrel.

In currency trading, the U.S. dollar fell to 133.76 Japanese yen from 134.16 yen. The euro cost $1.0707, up from $1.0690.

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AP Business Writer Stan Choe contributed.

Yuri Kageyama is on Twitter https://twitter.com/yurikageyama

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