Asia stocks set for best week of 2023, dollar reels on dovish Fed bets

A man watches stock quotations on an electronic board outside a brokerage, in Tokyo, Japan, March 20, 2023. REUTERS/Androniki Christodoulou

TOKYO  – Asian stocks rose on Friday, on course for their best week this year, as a cooling in U.S. inflation stoked speculation that the Federal Reserve could pause rate hikes after this month.

The dollar sank to a fresh 15-month low against major peers and U.S. Treasury yields languished near multi-week lows following the sharpest weekly drop in four months.

Gold was poised for its best week in three months as the dollar floundered, while crude oil rose to the highest in nearly three months.

While money market traders still see a quarter point bump to the Fed funds rate on July 26 as close to a sure thing, they have reduced the chances of another this year to just 1-in-5.

Data on Thursday showed the smallest increase in U.S. factory gate inflation in nearly three years, reinforcing the milder inflation outlook after a report the previous day showing consumer price gains mitigated to the slowest pace in more than two years.

“What it means is we’ve got the Fed with its chest pretty much crossing the finish line at the end of the most aggressive tightening cycle in four decades, so it does warrant the rapid repricing that we’ve seen in many of these asset classes,” said Tony Sycamore, a market analyst at IG in Sydney.

READ: Fed leaves rates unchanged, sees two small hikes by end of 2023

“The equity market absolutely took off, and the dollar is under intense pressure.”

MSCI’s broadest index of Asia-Pacific shares outside Japan rallied 0.7 percent on Friday to put it on track for a 5.4- percent weekly advance, the biggest for eight months.

Hong Kong’s Hang Seng gained 0.52 percent and mainland Chinese blue chips added 0.12 percent. South Korea’s Kospi jumped 1 percent.

Japan’s Nikkei, though, was a notable outlier, flipping early gains to be last down 0.43 percent as it struggles to find its feet following its retreat from a 33-year peak reached at the start of this month.

U.S. E-mini equity futures also pointed to a 0.16 percent lower restart for the S&P 500, after the index rallied 0.85 percent overnight.

Meanwhile, the U.S. dollar index – which measures the currency against six major peers – edged about 0.1 percent lower to touch 99.637 for the first time since April of last year.

“The dollar index can probably trade down toward 98 over the coming weeks without too many problems,” said IG’s Sycamore. “I wouldn’t be fighting that trend.”

U.S. two-year Treasury yields, which tend to be most sensitive to the Fed policy outlook, languished at 4.63 percent, following a 30 basis point slide this week that extended its drop from last week’s 16-year peak above 5 percent.

Ten-year yields wallowed around 3.77 percent following a 28 basis point decline since last Friday, when it reached an eight-month high at 4.094 percent.

Japan’s market was again an outlier, with the 10-year yield rising as high as 0.485 percent, taking it the closest its been to the Bank of Japan’s 0.5 percent policy ceiling since March 10.

Speculation that the BOJ could widen its 10-year yield band this month has been rising since a labor report a week ago showed solid growth in wages.

READ: Japan’s changing views on price hikes open door for BOJ policy tweak

In Australia, the government’s appointment of deputy governor Michele Bullock to lead the Reserve Bank of Australia from mid-September had little effect on markets.

READ: Australia appoints first female head for central bank

The Aussie dollar was flat at $0.6891, following two days of 1.5 percent gains against its U.S. peer to take it to the highest in a month.

In commodities, gold edged to a new one-month high at $1,963.59, buoyed by the dollar’s weakness. It has rallied nearly 2 percent this week.

Brent crude futures rose 27 cents, or 0.3 percent, to $81.63 per barrel on Friday. U.S. West Texas Intermediate crude futures rose 35 cents, or 0.5 percent, to $77.24.