Asian shares up, dollar wobbly as US inflation data reinforces Fed pause bets

SYDNEY: Asian shares rose and the dollar was under pressure on Wednesday after slowing US inflation solidified bets that the Federal Reserve would skip a hike later in the day, but uncertainty remained about further rate increases beyond this week.

The much-watched US CPI report overnight showed prices barely rose in May, with just a 0.1% increase from the prior month. On an annual basis, consumer prices rose 4%, the smallest in more than two years, slowing from April’s 4.9%.

That led traders to firm up expectations of a rate pause by the Fed to 91.9% when it concludes a two-day policy meeting on Wednesday, but the still-strong underlying price pressures suggest an over 60% probability the central bank could resume hikes in July, according to CME Group’s FedWatch Tool.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.2% in early regional trade, after surging 1.1% in the prior session to the highest in two months.

Tokyo’s Nikkei rose 1% to a fresh 33-year high, helped by expectations of extended ultra loose policy from the Bank of Japan. Regionally, the accommodative policy stance from China also lifted sentiment with signs of more easing to come.

China’s bluechips rose 0.5% while the Hong Kong’s Hang Seng Index was up 0.4%. Both S&P 500 futures and Nasdaq futures were flat, after a strong rally overnight to their highest closing levels in 14 months thanks to the softer US inflation data.

Asia shares track Wall Street rally with inflation data, Fed in focus

“While the soft headline inflation print gives the Fed the go-ahead to pause its rate hiking cycle on Thursday, sticky core inflation will keep the Fed’s hawkish trigger finger hovering over the rate hike button in the months ahead,” said Tony Sycamore, a market analyst at IG.

Perhaps reflecting some of those concerns, two-year Treasury yields hit 4.7070% overnight, the highest since March, before easing a little to 4.6556% in Asian hours. The benchmark 10-year yields also climbed to the highest in 2-1/2 weeks at 3.8450%. They were last at 3.8075%.

Markets would also be focusing on the post-policy press conference from Fed Chair Jerome Powell and whether the dot plot would signal any hikes ahead.

Persisting inflation pressures elsewhere are keeping markets jittery.

Data showing a rapid pickup in UK wage growth in the three months to April could complicate matters for the Bank of England, which is set to debate its monetary policy decision next week.

Short-dated German yields jumped to a 3-month high overnight as investors looked to the rate decision from the European Central Bank on Thursday.

It is expected to raise rates by another quarter-point and again in July before pausing for the rest of the year.

The US dollar remained pressured on Wednesday at 103.26 against its major peers, just a touch above a three-week low that it hit overnight.

The euro was hanging at $1.0794 after hitting a three-week top of $1.0823 overnight, while sterling settled at $1.2613, nearing a one-month high of $1.2625 reached overnight.

Oil prices were lower in early trade after receiving a 3% boost on China’s policy rate cut. US crude futures were off 0.5% to $69.12 per barrel, while Brent crude futures fell 0.4% to $74.02 per barrel.

Gold prices were slightly higher at $1,945.96 per ounce.