MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5% and was on track to fall 1% for the week, ending a four-week streak of gains. Japan’s Nikkei average fell 1.45%.
Chinese shares were little changed in early trading, with blue chips down 0.05% after China’s military began a second day of military drills around Taiwan on Friday. Hong Kong’s Hang Seng Index was down 0.33%.
Data on Thursday showed that U.S. jobless claims fell, while S&P Global’s flash PMI survey showed economic activity expanded at a faster pace in May than economists had expected.
Strong economic data and hawkish minutes from the Fed’s last meeting earlier this week have prompted traders to back off betting on a rate cut this year, with the market now expecting just a 35 basis point cut in 2024. A 150 basis point cut was expected at the start of the year. The market is now fully pricing in a December rate cut, making a September cut a coin toss, the CME FedWatch tool shows. “This week’s data reaffirms the Fed’s complete inability to provide policy accommodation,” said Prashant Neunach, senior Asia Pacific rates strategist at TD Securities. “Markets and the Fed will have to wait until there are cracks in the labor market before they can begin easing, but there is little evidence at this point that this will happen.”
Atlanta Fed President Raphael Bostic said the U.S. central bank may need to take more time to cut interest rates because upward pressures on prices remain strong despite a slight decline in inflation measures in April.
Shifting expectations around U.S. interest rates have pushed yields higher, with the benchmark 10-year Treasury yield hitting a more than one-week high of 4.498% on Thursday after closing at 4.463% in early Asian trading on Friday.
The dollar has also benefited, with the dollar index, which measures the U.S. currency against a basket of six major currencies, rising about 0.6 percent for the week to 105.06 and on track to post its biggest weekly gain since mid-April. [FRX/]
A stronger dollar continued to pressure the yen, which was trading at 157.03 to the dollar, not far from a three-week low of 157.19 hit on Thursday.
Japan’s core inflation slowed for a second straight month in April due to slowing food inflation but remained well above the central bank’s 2% target, government data released on Friday showed.
Bank of Japan Governor Kazuo Ueda said on Thursday that Japan’s economy is on track for a gradual recovery, suggesting that a drop in first-quarter gross domestic product (GDP) alone will not prevent the central bank from raising interest rates in coming months.
“We expect the Bank of Japan to keep its stance unchanged at its June meeting as it wants to see a recovery in economic growth, particularly private spending and wage growth, that may be seen in July,” the ING economists said.
The pound was weak at $1.2694 on Friday after hitting a two-month high of $1.2761 on Wednesday as traders considered the interest rate outlook after data released this week showed inflation in April did not fall as much as expected.
The launch of election campaigning between British Chancellor Rishi Sunak and his Labour rival Keir Starmer dominated attention on Thursday, but analysts said the vote was unlikely to have a major impact on markets.
In commodity markets, oil prices were stable with Brent crude oil at $81.39 a barrel and US West Texas Intermediate (WTI) crude futures at $76.87. [O/R]
Gold prices rose 0.24% to $2,334.16 an ounce but are still expected to fall 3.3% in the week since late September. [GOL/]
