SINGAPORE, April 12 (Reuters) – Asian equities drifted lower on Wednesday ahead of a crucial U.S. inflation report that will likely influence how soon the Federal Reserve will end its aggressive rate hikes, with markets betting on at least one more at next month’s policy meeting.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was 0.17% lower in choppy trading, set to snap its three day winning streak.
The subdued mood looked set to continue in Europe, with futures indicating a broadly lower open. The Eurostoxx 50 futures was down 0.16%, German DAX futures up 0.01% and FTSE futures down 0.07%.
After Friday’s jobs report showed a resilient U.S. labour market, emboldening bets of a 25 basis point hike at the Fed’s next meeting in May, investor attention is firmly on the March inflation report due later in the day.
The consumer price index is expected to show core inflation rose 0.4% on a monthly basis and 5.6% year-over-year in March, according to a Reuters poll of economists.
“The focus will shift from the decline in the headline inflation towards underlying inflation pressures and how sticky it might be which could have an impact on how long the Fed needs to leave the interest rates at higher levels,” Shane Oliver, head of investment strategy at AMP Capital in Sydney.
Oliver said a risk to markets is that narrative changes from inflation to risk of recession and the markets aren’t particularly worried about it at present, because it has been talked about for so long and it hasn’t happened yet.
Markets are now pricing in a 66% chance of the Fed raising interest rates by 25 basis points in May and then pausing for the subsequent meetings, according to the CME FedWatch tool.
Philadelphia Federal Reserve Bank President Patrick Harker on Tuesday said he feels the U.S. central bank may soon be done raising interest rates, but reiterated the desire to bring inflation back to its 2% target.
The Fed last month raised interest rates by a quarter of a percentage point, taking it to a range of 4.75% to 5.00%.
“I’m in the camp of getting up above 5 and then sitting there for a while,” Harker said.
Minutes of its March meeting are due to be released later in the day and investors will parse through it for clues on Fed’s monetary path of the central bank as well as the impact of the stress in the banking sector.
The International Monetary Fund warned on Tuesday that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year as it lowered its 2023 global growth forecasts.
The turmoil in the banking sector following the failure of Silicon Bank and Signature Bank had spurred some expectations that the Fed may need to cut interest rates to alleviate some of the stress in the market but a sticky inflationary environment is unlikely to give the Fed much room.
The cut in oil production announced by the OPEC+ group last week also fanned fears of inflation flaring up, and for investors to really lower their concerns over inflation there will have to be a clear fall in prices for services, Saxo Markets strategists said.
“We don’t think we are there yet. With oil prices rising again and labour market cooling only gradually, risk remains tilted for core inflation to remain elevated for longer,” they said.
China shares were mixed, with the Shanghai Composite Index (.SSEC) up 0.4% while Hong Kong’s Hang Seng Index (.HSI) sank 1.2% as investors weighed rising geopolitical tensions.
China said on Wednesday that President Tsai Ing-wen was pushing Taiwan into “stormy seas” after Beijing held military exercises in response to Tsai’s recent meeting with U.S. House Speaker Kevin McCarthy in California.
Tsai said the overseas trip, which included the meeting with McCarthy in the United States and stops in Guatemala and Belize, showed Taiwan’s determination to defend freedom and democracy.
Elsewhere in Asia, Japan’s Nikkei (.N225) was 0.6% higher, while Australia’s S&P/ASX 200 index (.AXJO) rose 0.41%.
In the currency market, the dollar index , which measures the U.S. currency against six rivals, eased 0.049%. The euro was up 0.12% at $1.0923, while sterling was last trading at $1.2435, up 0.09% on the day.
The yen weakened 0.09% to 133.80 per dollar. The IMF said the Bank of Japan could help prevent abrupt policy changes later by allowing more flexibility in its bond yield curve control.
U.S. crude rose 0.06% to $81.58 per barrel and Brent was at $85.65, up 0.05% on the day.
Spot gold added 0.8% to $2,018.25 an ounce. U.S. gold futures gained 0.55% to $2,015.90 an ounce.
Reporting by Ankur Banerjee; Editing by Christopher Cushing & Simon Cameron-Moore
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