LDN - Business

Asian shares muted, dollar buoyant on odds of rate rise

[April 10, 2023] By Ankur Banerjee

SINGAPORE (Reuters) - Asian shares inched higher, while the dollar started the week on the front foot after U.S. jobs data pointed to a tight labour market, firming up expectations that the Federal Reserve will again raise interest rates at its meeting next month.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.12% higher, while Japan's Nikkei gained 0.5%. Australian, Hong Kong and European markets are closed for Easter.

E-mini futures for the S&P 500 eased 0.02%, while the rate-sensitive Nasdaq was poised for a lower open with Nasdaq 100 e-minis down 0.25%.

China shares slipped on Monday, with the blue chip CSI300 Index 0.32% lower, while the Shanghai Composite Index slipped 0.16% amid rising geopolitical tensions around the Taiwan Strait.

China announced three days of drills on Saturday, after Taiwan's President Tsai Ing-wen returned to Taipei following a meeting in Los Angeles with U.S. House of Representative Speaker Kevin McCarthy.

China's military carried out aerial and naval blockade drills around Taiwan on Monday, with a Chinese aircraft carrier joining in combat patrols as Taipei reported another surge of warplanes near the island.

U.S. Labor Department data on Friday showed that nonfarm payrolls increased by 236,000 jobs last month, just shy of the 239,000 expected by economists in a Reuters poll.

The closely-watched report also showed that annual wage gains slowed but remained too high to be consistent with the U.S. central bank's 2% inflation target.

The labour market is still too tight for the Fed to lower inflation to its 2% target without further interest rate hikes, said Mansoor Mohi-uddin, chief economist at the Bank of Singapore.

"Investors are anticipating last month's U.S. bank failures will force the Fed to cut rates but officials warn sticky inflation will make the Fed unlikely to ease policy this year."

Markets are now pricing in a 66% chance of the Fed raising interest rates by 25 basis points in its May 2-3 meeting, up from 49.2% on Thursday ahead of the data, according to CME FedWatch tool.

Investor focus will now turn to the inflation report due on Wednesday that will shape the path the Fed will take in its battle against prices. Minutes of the central bank's last meeting in March are also scheduled to be released on Wednesday.

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People walk past a screen displaying the Hang Seng stock index outside Hong Kong Exchanges, in Hong Kong, China July 19, 2022. REUTERS/Lam Yik/File Photo

With recession worries mounting, investors are betting the tumult in the banking system sparked by the sudden collapse of Silicon Valley Bank in March will tighten credit conditions. Traders have increasingly become convinced that the Fed will cut rates in the second half to ward off an economic downturn.

But some analysts see a disconnect between the Fed's likely path and market expectations.

"Not only should high inflation and a still-strong labour market keep cuts unlikely," according to Citi strategists. "But we see persistently too-strong inflation as leading to further hikes." Citi expects three further 25 basis point rate hikes.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, eased to 3.951%, after closing at 3.993% on Friday's abbreviated trading. The yield on 10-year Treasury notes was at 3.372%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -57.7 basis points. This curve has been inverted since July last year and typically predicts a recession.

In the currency market, the dollar index, which measures the U.S. currency against six major peers, rose 0.225% to 102.25, lifting away from the two-month low of 101.40 the index touched last week.

The euro was down 0.06% to $1.0891, while sterling was last at $1.24, down 0.10% on the day.

The yen weakened 0.41% to 132.69 per dollar as Japan's new central bank governor Kazuo Ueda takes over from Haruhiko Kuroda. Ueda, whose term began on Sunday, will hold his inaugural news conference at 1015 GMT on Monday.

Spot gold dropped 0.8% to $1,992.35 an ounce. U.S. gold futures fell 0.95% to $1,992.80 an ounce.[GOL/]

U.S. crude fell 0.09% to $80.63 per barrel and Brent was at $85.00, down 0.14% on the day. [O/R]

(Reporting by Ankur Banerjee; Editing by Shri Navaratnam and Jacqueline Wong)

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