Asian shares faced difficulties gaining momentum, and the dollar remained subdued as market attention focused on the likelihood of a less aggressive stance from the Federal Reserve at its upcoming policy meeting concluding on Wednesday.
Expectations are high that the Fed will refrain from raising interest rates following a softer U.S. inflation report. This cautious sentiment is expected to carry over to European markets upon opening.
Futures for the pan-regional Euro Stoxx 50 index slipped by 0.2%. S&P 500 futures and Nasdaq futures were flat after U.S. stocks surged to 14-month highs in the previous session.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan dipped by 0.2% after a strong 1.1% surge in the previous session, marking a two-month high.
Meanwhile, Tokyo’s Nikkei continued to outperform, jumping by 1.6% to reach a fresh 33-year high, buoyed by inflation optimism and the Bank of Japan’s accommodative policy stance.
Chinese blue chips also saw a 0.2% rise, extending gains for the fifth consecutive session and moving away from 2023 lows, driven by hopes of increased economic stimulus. However, Hong Kong’s Hang Seng index declined by 0.4% amid concerns about the adequacy of the stimulus to revive the struggling economy.
Analysts polled by Reuters anticipate a potential cut in China’s medium-term policy loan borrowing cost by the central bank on Thursday, which would be the first reduction in 10 months following a decrease in a short-term policy rate.
The highly anticipated U.S. Consumer Price Index (CPI) report revealed minimal price increases in May, with a mere 0.1% uptick from the previous month. On an annual basis, consumer prices rose by 4%, the slowest pace in over two years, decelerating from April’s 4.9%.
This led traders to solidify their expectations of a rate pause by the Federal Reserve, with a 94% likelihood, during the two-day policy meeting. However, there remains a 60% probability priced in for a rate hike in July, according to CME FedWatch Tool.
“While the soft headline inflation print gives the Fed the go-ahead to pause its rate hiking cycle on Thursday, sticky core inflation will keep the Fed’s hawkish trigger finger hovering over the rate hike button in the months ahead,” commented Tony Sycamore, a market analyst at IG.
In response to these concerns, two-year Treasury yields reached 4.7070% overnight, the highest since March, before easing by 4 basis points to 4.6519% during Asian trading hours. Benchmark 10-year yields also climbed to their highest level in 2-1/2 weeks at 3.8450% before dropping by 3 basis points to 3.8056%.
“We think it will be a hawkish pause as the Fed emphasizes that the hiking cycle might not be done. Whether the pause turns into a skip will depend on incoming data,” noted Eugene Leow, senior rates strategist at DBS Bank.
Persistent inflation pressures in other regions continue to make markets nervous. UK wage growth data for the three months leading to April showed a rapid increase, potentially complicating matters for the Bank of England, which is scheduled to discuss its monetary policy decision next week.
Short-dated German yields rose to a three-month high overnight as investors awaited the rate decision from the European Central Bank on Thursday. The ECB is expected to raise rates by another quarter-point and then pause for the rest of the year.
The U.S. dollar remained under pressure within a narrow range, hovering at 103.29 against major peers