By Ankur Banerjee
SINGAPORE (Reuters) – Asian shares fell on Friday while the dollar advanced as strong U.S. economic data reinforced the prospect of interest rates staying higher for longer and the Federal Reserve took its time cutting rates, keeping investors away from risky assets.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5% and was on track for a weekly decline of 1%, snapping a four-week winning streak. Japan’s Nikkei fell 1.45%.
Chinese shares were little changed in early trading, with blue chip stocks down 0.05% as the Chinese military began its second day of war games around Taiwan on Friday. Hong Kong’s Hang Seng index was 0.33% lower.
Data on Thursday showed US jobless claims fell, while S&P Global’s Flash PMI survey showed business activity grew faster than economists had forecast in May.
The robust economic data, along with the hawkish minutes from the Fed’s latest meeting earlier this week, have led traders to dial back their bets on rate cuts this year, with markets now pricing in just 35 basis points of easing in 2024, while the expectations are at 150 basis points. of the cuts at the beginning of the year.
Markets have now fully priced in a December rate cut, while a September cut is now a matter of money, CME’s FedWatch tool showed.
“This week’s data reaffirms that the Fed is simply unable to provide policy accommodation,” said Prashant Newnaha, a senior rates strategist for Asia-Pacific at TD Securities.
“The market and the Fed will simply have to wait until there are cracks in the labor market before they can start easing, and right now there is little evidence that this is the case.”
Atlanta Fed Chairman Raphael Bostic said the U.S. central bank may have to wait longer to cut rates as there remains continued upward pressure on prices even with slightly lower inflation figures in April.
Changing expectations around U.S. yields have pushed yields higher, with the U.S. 10-year yield hitting a more than one-week high of 4.498% on Thursday. The last reading was 4.463% in the early Asian hours on Friday.
The dollar has also benefited, with the dollar index, which measures the US currency against a basket of six major peers, up almost 0.6% this week to 105.06, on track for the biggest one-week gain since mid- April. [FRX/]
The rise in the dollar has maintained pressure on the yen. The Japanese currency was last at 157.03 per dollar, not far from Thursday’s three-week low of 157.19.
Japan’s core inflation slowed for a second straight month in April due to milder food inflation, while remaining well above the central bank’s 2% target, government data showed on Friday.
Bank of Japan Governor Kazuo Ueda said Thursday that the economy is on track for a moderate recovery. This suggests that a slump in gross domestic product in the first quarter alone would not prevent the central bank from raising rates in the coming months.
“We believe that the Bank of Japan will leave its position unchanged at its June meeting as it looks to embrace the turnaround in economic growth, especially in private spending and wage growth, that could be seen in July want to confirm,” said economists from ING.
Sterling was muted at $1.2694 on Friday, after hitting a two-month high of $1.2761 on Wednesday, as traders pondered the interest rate outlook in the wake of data this week showing inflation in April was not as much delayed as expected.
The start of the election campaigns of British Prime Minister Rishi Sunak and his Labor Party rival Keir Starmer attracted attention on Thursday, although analysts said the poll is unlikely to have a major effect on markets.
In terms of commodities, oil prices were stable, with Brent crude at $81.39 per barrel. US West Texas Intermediate Crude (WTI) futures traded at $76.87. [O/R]
Gold prices rose 0.24% to $2,334.16 an ounce, but are set to fall 3.3% this week since late September. [GOL/]
(Editing by Lincoln Feast.)
