Asian share markets followed Wall Street lower on Monday while the US dollar looked vulnerable ahead of a reading on US inflation that could hasten, or delay, the start of global rate cuts.
The yen edged higher as data released on Monday showed Japan was not, in fact, in recession after economic growth was revised up to an annualised 0.4 per cent for the December quarter.
Reuters reported a growing number of Bank of Japan policymakers are warming to the idea of ending negative rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations.
Tuesday’s US consumer price index (CPI) report for February is forecast to rise 0.4 per cent for the month and keep the annual pace steady at 3.1 per cent. Core inflation is seen rising 0.3 per cent, which will nudge the annual pace down to the lowest since early 2021 at 3.7 per cent.
The slower core would complement the softer conditions seen in the February payrolls report, where unemployment hit a two-year high of 3.9 per cent, and would keep the Federal Reserve on track to cut rates in the next few months.
“We continue to expect four 25bp cuts in the Fed funds rate this year, starting in June,” analysts at Goldman Sachs wrote in a note. “However, the soft employment report increases the odds that the FOMC begins the easing cycle in May instead.”
“We expect that developed market central banks will lower policy rates by 128bp on average over the next 12 months,” they added. “We also expect that emerging market central banks will cut rates by 190bp on average.”
Futures imply about a 30 per cent chance of a Fed cut in May and 70 per cent for a first move in June.
Chinese price data out over the weekend showed a welcome bounce in inflation to 0.7 per cent in February, though producer prices remained mired in deflation.
Beijing also promised to improve home sales in a “forceful” and “orderly” way to support the country’s beleaguered residential property market, but was short on details.
Hopes for lower borrowing costs have been a fillip for equities with MSCI’s broadest index of Asia-Pacific shares outside Japan easing 0.3 per cent, after hitting an eight-month peak on Friday.
Japan’s Nikkei lost 1.2 per cent on Monday, having scored a succession of all-time highs last week.
S&P 500 futures and Nasdaq futures were a fraction lower, having both run into profit taking on Friday as artificial intelligence diva Nvidia shed 5.6 per cent.
Treasury bonds continued their rally after the benign jobs report with 10-year yields touching a one-month low of 4.038 per cent and last trading at 4.080 per cent.
The drop in yields has undermined the dollar, especially against the yen given markets are speculation the Bank of Japan could end its negative rate policy (NIRP) and yield curve control (YCC) this month.
“We expect JPY strength tactically on short-covering in the build-up to the March 18/19th BoJ meeting, one we think is live for a change in YCC and NIRP, and recent higher inflation readings only add to our conviction to be tactically long JPY,” said Paul Robson, head of G10 FX strategy at NatWest Markets.
“We’ve turned tactically bearish the USD and initiated short positions vs both EUR and JPY,” he added. “Our short-term fair value model suggests EUR/USD is too low based on bond spreads and relative curve steepness.”
The dollar was off at 146.84 yen, having shed two per cent last week to a five-week low of 146.48.
The euro was holding firm at $US1.0939, after bouncing 0.9 per cent last week to as high as $US1.0980.
The decline in the US dollar and bond yields has been supportive of non-yielding gold which was up at $US2,180 an ounce , having surged 4.5 per cent last week to record peaks.
Oil prices have had a tougher time as worries about China’s demand offset supply cuts by producer group OPEC+.
Brent dipped 27 cents to $US81.81 a barrel, while US crude edged down 23 cents to $US77.78 per barrel.
This post was originally published on Michael West.
