SYDNEY: Asian shares were cautious on Friday as the escalating conflict in the Red Sea region sent oil prices surging, while slightly higher-than-expected US inflation data did not dent investors’ views on early and aggressive rate cuts in the US and Europe.
The rally in rates may have been helped by dovish comments from European Central Bank (ECB) President Christine Lagarde who said rate cuts would occur if the central bank has certainty that inflation had fallen to the 2% level.
In breaking news, the United States and Britain have started carrying out strikes against targets linked to Houthis in Yemen, after the Iran-backed group attacked international ships in the Red Sea.
Brent futures jumped 2% to $78.95 a barrel, while US West Texas Intermediate (WTI) crude rose 2.1% to $73.53.
The intensifying conflict in the Red Sea has kept shares on edge.
MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1%, although Japan’s Nikkei gained 1.2% to another 34-year high, boosted by a weak yen.
Chinese inflation data showed the country’s economic recovery remained weak in December, with the consumer price index falling 0.3% from a year ago.
For all of 2023, consumer inflation stood at 0.2%, lower than the official target of around 3%. China’s blue chips slipped 0.3%.
Hong Kong’s Hang Seng index also fell 0.3%.
Overnight, Wall Street reversed earlier declines and was mostly flat on the day after data showed US consumer prices rose more than expected in December, with a closely watched core measure coming in slightly above consensus.
Asia stocks gain ahead of US CPI, Nikkei breaches 35,000
Andrew Lilley, chief rates strategist at Barrenjoey, said that even though the core US inflation data came in a little stronger than expected, it does not suggest a strong read on PCE, which is the Fed’s preferred gauge of inflation.
“Additionally to that, the Fed speakers that we had last night all sounded incrementally more dovish than they had previously and … we didn’t hear such a strong pushback on the idea of a March cut from everybody who spoke,” he added.
Fed officials took few fresh signals from the inflation data, with Richmond Fed President Thomas Barkin saying it did little to clarify the path of inflation.
Chicago Fed President Austan Goolsbee said he was not sure if the data indicated enough progress for the Fed to start cutting rates, while Cleveland Fed President Loretta Mester said a March rate cut was “too early in my estimation”.
Futures added to the bets on an interest rate cut in March at a 73% probability, compared with 68% a day earlier.
They are also pricing in around 150 basis points of easing this year, compared with the Federal Reserve’s dot plot of 75 basis points.
“Lagarde has also similarly been pushing back against the (rate cut) idea … So as soon as Lagarde changes her tune, and last night she did change her tune, the market is starting to move the timing of those cuts forward,” said Lilley.
Euribor money market futures added as much as 10 basis points overnight. Swaps have moved to fully price in a quarter-point rate cut in April, with a 30% chance of an outsized 50 bp cut, while a total of 148 bps in easing has been priced in for this year.
Treasuries were steady in Asia after the rally, led by the short end of the curve.
The two-year yield was at 4.2639% in Asia, having fallen 11 basis points overnight, while the 10 year was little changed at 3.9828%, after easing 5 bps overnight.
In the foreign exchange market, the dollar failed to make any headway from the slightly firmer-than-expected US inflation data.
The dollar index was little changed at 102.29 against its major peers, after ending the previous session slightly lower. Spot gold rose 0.3% to $2,033.63 an ounce.
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