Asian shares fell slightly on Wednesday, ahead of key US inflation data that would likely impact the Federal Reserve’s monetary policy course, with markets betting on another rate rise at the central bank’s next meeting.
In volatile trade, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.17%. The Nikkei 225 index in Japan increased 0.49%, while the S&P/ASX 200 index in Australia rose 0.65%.
China’s equities opened neutral, with the Shanghai Composite Index up 0.1% and the Hong Kong Hang Seng Index down 0.02%. According to data released on Tuesday, China’s consumer inflation in March was the lowest since September 2021.
Investor attention is firmly focused on the March inflation data expected later in the day after Friday’s employment report revealed a strong U.S. labour market, emboldening betting of a 25 basis point boost at the Fed’s next meeting in May and emboldening bets of a 25 basis point hike at the Fed’s next meeting in May.
According to a Reuters survey of experts, core inflation in March is predicted to be 0.4% higher on a monthly basis and 5.6% higher year over year.
“Investors are hopeful that Wednesday’s inflation data could signal that the Federal Reserve is nearing the end of its rate hike cycle,” said Harry Ottley, an economist at Commonwealth Bank of Australia, noting that attention has shifted from March banking wobbles to the inflation problem.
According to the CME FedWatch tool, markets are currently pricing in a 66% likelihood of the Fed hiking interest rates by 25 basis points in May and then stopping for the following sessions.
Philadelphia Federal Reserve Bank President Patrick Harker said on Tuesday that the Federal Reserve Bank of the United States may soon be done increasing interest rates, but he stressed the Fed’s objective to return inflation to its 2% target.
The Federal Reserve boosted interest rates by a quarter percentage point last month, bringing them to a range of 4.75% to 5.00%.
The minutes of its March meeting will be disclosed later in the day, and investors will scrutinise them for hints on the central bank’s monetary policy as well as the effect of the March financial pressures.
The upheaval in the banking industry has fueled speculation that the Fed may need to lower interest rates to ease some of the market stress, but a sticky inflationary environment is unlikely to allow the Fed much leeway.
“Investors appear to be getting ahead of themselves in expecting the Fed to begin cutting interest rates,” said Pictet Asset Management’s chief analyst, Luca Paolini.
The Fed, like other central banks, has its hands tied since rising inflation will prevent it from delivering monetary assistance in the coming months, according to a note by Paolini.
As it cut its global growth predictions for 2023, the International Monetary Fund warned on Tuesday that hidden financial system weaknesses might flare into a new crisis and hammer the global economy this year.
The dollar index, which measures the US currency against six competitors, lost 0.049% in the currency market. The euro was up 0.12% at $1.0923, while sterling was up 0.06% on the day at $1.2431.
The yen rose 0.04% to 133.63 per dollar. According to the IMF, the Bank of Japan may help avert future policy adjustments by providing greater flexibility in its bond yield curve management.
Changes in the BOJ’s yield control policy may have an impact on financial markets through exchange rates, term premiums on sovereign bonds, and global risk premiums, according to the IMF.
US crude increased 0.07% to $81.59 per barrel, while Brent was up 0.14% to $85.73. [O/R]
Spot gold increased 0.3% to $2,009.72 per ounce. Gold futures in the United States rose 0.10% to $2,006.90 per ounce.