Asian stocks are poised for a fifth consecutive month of gains on Friday, driven by the growing view that cooling U.S. inflation will allow the Federal Reserve to ease rates this year.
Friday is packed with risk events for markets after a relatively subdued rest of the week, including the first U.S. presidential debate between Democratic President Joe Biden and his Republican rival Donald Trump in Atlanta ahead of the November elections.
Chinese markets experienced a rough start as investors were nervous about what the candidates might say regarding trade relations with Beijing, which have deteriorated in recent years. Both Biden and Trump have favored a tough trade stance, imposing and threatening tariffs, particularly on China.
Hong Kong’s Hang Seng Index was last down 0.1%, while China’s benchmark edged 0.05% lower.
On the data front, May’s U.S. core personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, is due later on Friday and could provide further clarity on the U.S. rate outlook.
“If tonight’s core PCE inflation were to come in much hotter than the 2.6% expected and after upside surprises to Canadian and Australian inflation data this week, it would inflame concerns that the decline in global inflation has bottomed out and may have reaccelerated in some countries,” said Tony Sycamore, a market analyst at IG.
MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.03%, but was on track to gain about 3.1% for the month, its best performance since February.
Growing expectations of an imminent Fed easing cycle and momentum from the artificial intelligence boom have sparked a risk rally across stock markets and propelled Wall Street to record highs, in turn lifting Asian shares.
Traders are now pricing in a 64% chance of a first Fed cut in September, up from 50% a month ago, according to the CME FedWatch tool.
S&P 500 futures and Nasdaq futures both ticked higher, rising 0.23% and 0.41%, respectively.
The dollar was on the front foot in currency markets, pushing the Aussie 0.4% lower to $0.6621. The euro dipped 0.16% to $1.0687 and was headed for a 1.5% monthly decline, weighed down by political turmoil in the bloc, with France’s snap election due to kick off this weekend.
YEN SLIDES
The yen tumbled to a fresh 38-year low on Friday, hitting a trough of 161.27 per dollar, its weakest since 1986. The Japanese currency has fallen about 2.3% this month and more than 12% for the year against a resilient dollar, as it continues to be hammered by stark interest rate differentials between the U.S. and Japan, which have maintained the appeal of using the yen as a funding currency for carry trades.
In a carry trade, an investor borrows in a currency with low interest rates and invests the proceeds in higher-yielding assets.
The latest decline in the Japanese currency has kept investors on edge, watching for possible intervention from Tokyo. Japanese authorities spent 9.79 trillion yen ($60.94 billion) at the end of April and in early May to push the yen up 5% from its 34-year low of 160.245 then.
“While the level of yen is one factor to consider, officials do focus on the pace of depreciation as the intent of intervention is to curb excessive volatility,” said Christopher Wong, a currency strategist at OCBC. “I think they may just hold on a little more … unless we get a rapid move to 164-165,” he said.
The yen’s weakness has meanwhile been a boon for the Nikkei, which was last more than 1% higher. It was eyeing a monthly gain of more than 3%.
Data on Friday showed core consumer prices in Japan’s capital rose 2.1% in June from a year earlier, highlighting the challenge the Bank of Japan faces in timing its next interest rate hike. Cost pressures from the weak yen keep inflation above its 2% target but also hurt consumption.
Separately, the Nikkei business daily reported on Friday that Japan’s government has appointed Atsushi Mimura as its top currency diplomat, replacing Masato Kanda.
In commodity markets, gold struggled under the pressure of a firm dollar and fell 0.26% to $2,321.19 an ounce. Brent crude oil futures rose 0.39% to $86.73 a barrel, while U.S. West Texas Intermediate crude futures gained 0.42% to $82.08 per barrel.
