Asian stocks have risen on course for a third week of gains, while the dollar was on the back foot as fresh signs of an easing US labour market stoked optimism around interest rate cuts this year, ahead of crucial inflation data next week.
The sterling was steady at $US1.2515, touching over a two-week low of $US1.2446 on Thursday after the Bank of England (BoE) paved the way for rate cuts to begin as soon as June.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.66 per cent and was on course for a nearly 1 per cent gain for the week, its third straight week of gains. Japan’s Nikkei was 1.6 per cent higher.
China stocks also gained, with blue-chip shares 0.14 per cent higher, while Hong Kong’s Hang Seng Index rose 1.4 per cent, having touched an eight month high in early trading.
Data on Thursday showed US initial claims for state unemployment benefits increased more than expected by 22,000 to a seasonally adjusted 231,000 for the week ended May 4, the Labor Department said.
The figures follow last week’s report showing US job growth slowed more than expected in April and the increase in annual wages fell below 4.0 per cent for the first time in nearly three years.
“After a period of remarkable strength and resilience, signs are growing that the US labour market may be starting to soften,” said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.
Brandham said the softer labour market should help the Fed in the fight against inflation, even if the central bank is hoping to tame prices without materially impacting the labour market.
Markets will be closely watching the April US producer price index (PPI) and the consumer price index (CPI) out next week for signs that inflation has resumed its downward trend towards the Fed’s 2 per cent target rate.
Hotter-than-expected inflation reports in April knocked back any lingering expectations of interest rate cuts in the near term, with markets now fully pricing in a 25-basis-point rate cut only in November, though there remains a chance of a cut in September.
Traders now anticipate 47bps of cuts this year from the Fed, drastically lower than the 150bps they priced in at the start of 2024.
The shifting expectations around US rates have kept the dollar adrift, with the euro holding to its 0.3 per cent overnight gains and last at $US1.0778. The single currency was on track for its fourth straight week of gains on the dollar.
The dollar index, which measures the US currency versus six peers, was little changed at 105.24.
BOE Governor Andrew Bailey said there could be more reductions than investors expect, in the latest sign of the growing divergence between rate outlooks in Europe and the United States, with interest rates expected to fall earlier and further across Europe than in the US.
Markets now imply a 50-50 chance of a BoE cut in June and are almost fully priced for August. They also imply an 88 per cent chance the European Central Bank will ease in June.
The yen remains in the spotlight after last week’s suspected rounds of interventions from Japanese authorities. It was last at 155.51 per dollar, with Japan’s Finance Minister Shunichi Suzuki repeating Tokyo’s recent warnings that it was ready to take action against disorderly currency moves.
Data from the Bank of Japan suggests Tokyo spent nearly $US60 billion last week in suspected interventions to pull the yen off its 34-year lows of 106.245 per dollar. However, with the yen nudging its way up to the 155 levels, traders are once again on intervention alert.
Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management, said the Ministry of Finance wants to avoid spikes in volatility which could negatively impact domestic financial markets.
“So like we suspect a few days ago, they will intervene if intraday moves become too large. But I don’t think they’ll push against a steady depreciation, like we’ve seen since.”
In commodities, oil prices were on the rise, with US crude up 0.63 per cent to $US79.76 per barrel and Brent at $US84.33, up 0.54 per cent on the day.
Spot gold added 0.3 per cent to $US2,352.92 an ounce.