Asia stocks up, US bond yields down as inflation fears ease

SHANGHAI: US bond yields dipped to three-month lows and a broad gauge of Asian shares rose on Friday as investors looked past rising US consumer prices and focused on one off-factors which suggested higher inflation could be short-lived.

Some economists say the rise in the US consumer price index reflected short-term adjustments related to the reopening of the economy, and many investors appear confident that the Federal Reserve is deftly handling a rebound in economic growth - even as questions remain about how it defines "transitory".

European bourses were set for a stronger open a day after the European Central Bank raised its growth and inflation projections, while pledging a steady flow of stimulus for now.

Pan-region Euro Stoxx 50 futures were up 0.2% in early trades and German DAX futures gained 0.08%. FTSE futures rose 0.2%.

Data overnight showed the US consumer price index posted its biggest year-on-year increase since August 2008 at 5%, following a 4.2% rise in April.

However, there were hefty contributions from short-term rises in airline ticket prices and used cars, raising some doubts about underlying inflationary pressures.

At the same time, US Labor Department data showed the lowest level of new claims for unemployment benefits in nearly 15 months last week.

MSCI's broadest index of Asia-Pacific shares outside Japan was last up 0.38%. Japan's Nikkei swung between small gains and losses before finishing a hair lower.

"Last night's print is just one in a long string of evidence that inflation is not just rising, but is more than just transitory base effects," said Rob Carnell, Asia-Pacific chief economist at ING in Singapore.

"But the Fed, which meets next week, can still point to no deviation of inflation expectations to back up its continued mantra of transitory inflation. The market is buying that for now."

Elsewhere in Asia, Seoul's Kospi rose 0.69%, Australian shares added 0.16% and Hong Kong's Hang Seng index gained 0.49%. Chinese blue-chip shares were down 0.69% as consumer staples firms retreated following two days of gains.

Broad credit growth in China continued to slow in May, as the country's central bank seeks to slowly unwind emergency pandemic measures and contain rising debt in the world's second-largest economy.

"Because of very strong external demand the negative impact from credit deceleration should be OK in the next three to six months, mainly thanks to the strong demand from the US," said Larry Hu, economist at Macquarie in Hong Kong.

"(But) once the demand from the US is back to normal then I think the Chinese economy is going to feel more pain from the credit tightening."

On Thursday, US stocks rallied to record highs, with the S&P 500 gaining 0.47% to an all-time high of 4,239.18. The Dow Jones Industrial Average rose 0.06% and the Nasdaq Composite added 0.78%.

FLATTENING CURVE

Easing expectations that quickening inflation could lead to early Fed tightening prompted a flattening of the US yield curve, with the spread between the 10-year and 2-year yield at its narrowest since late February on Friday.

The 10-year US Treasury note's yield dipped to a three-month low of 1.4340%, down from Thursday's close of 1.459%. It was last at 1.4401%, on course for its steepest weekly drop in a year.

The 30-year yield touched 2.1270%, its lowest level since Feb. 26.

The greenback fell as yields dipped. The dollar index trimmed 0.08% to 89.999 and the euro gained 0.12% to $1.218, but the Japanese yen weakened to 109.41 per dollar.

Hopes for stronger economic demand following the US unemployment claims report lifted oil prices to two-year highs on Thursday.

In Asia trade on Friday, global benchmark Brent crude was last at $72.39 per barrel, down 0.18% on the day, and US West Texas Intermediate crude dipped 0.17% to $70.17 per barrel.

Spot gold crept 0.08% higher to $1,899.66 an ounce on a softer dollar.