Asia shares slip, yen firms as Japan GDP data revised up

Stacked containers are seen at an industrial port in Tokyo, Japan Feb 15, 2024. REUTERS/Issei Kato

SYDNEY – Asian share markets followed Wall Street lower on Monday while the dollar looked vulnerable ahead of a reading on U.S. inflation that could hasten, or delay, the start of global rate cuts.

The yen edged higher as data released on Monday showed Japan was not, in fact, in recession after economic growth was revised up to an annualized 0.4 percent for the December quarter.

Reuters reported a growing number of Bank of Japan policymakers are warming to the idea of ending negative rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations.

Tuesday’s U.S. consumer price index (CPI) report for February is forecast to rise 0.4 percent for the month and keep the annual pace steady at 3.1 percent . Core inflation is seen rising 0.3 percent , which will nudge the annual pace down to the lowest since early 2021 at 3.7 percent .

Fed interest rate cuts

The slower core would complement the softer conditions seen in the February payrolls report, where unemployment hit a two-year high of 3.9 percent, and would keep the Federal Reserve on track to cut rates in the next few months.

“We continue to expect four 25bp cuts in the Fed funds rate this year, starting in June,” analysts at Goldman Sachs wrote in a note. “However, the soft employment report increases the odds that the FOMC begins the easing cycle in May instead.”

READ: Fed’s Powell still sees rate cuts, but inflation progress ‘not assured’

“We expect that developed market central banks will lower policy rates by 128bp on average over the next 12 months,” they added. “We also expect that emerging market central banks will cut rates by 190bp on average.”

Futures imply about a 30-percent chance of a Fed cut in May and 70 percent for a first move in June.

Chinese price data out over the weekend showed a welcome bounce in inflation to 0.7 percent in February, though producer prices remained mired in deflation.

Beijing also promised to improve home sales in a “forceful” and “orderly” way to support the country’s beleaguered residential property market, but was short on details.

READ: China consumer prices rise in February for first time in six months

Hopes for lower borrowing costs have been a fillip for equities with MSCI’s broadest index of Asia-Pacific shares outside Japan easing 0.3%, after hitting an eight-month peak on Friday.

Japan‘s Nikkei lost 1.2 percent , having scored a succession of all-time highs last week.

BOJ turning positive

S&P 500 futures and Nasdaq futures were a fraction lower, having both run into profit taking on Friday as artificial intelligence diva Nvidia shed 5.6 percent.

Treasury bonds continued their rally after the benign jobs report with 10-year yields touching a one-month low of 4.038 percent and last trading at 4.08 percent .

The drop in yields has undermined the dollar, especially against the yen given markets are speculation the Bank of Japan could end its negative rate policy (NIRP) and yield curve control (YCC) this month.

READ: Japan sees growing momentum towards March end to negative rates

“We expect JPY strength tactically on short-covering in the build-up to the March 18/19th BoJ meeting, one we think is live for a change in YCC and NIRP, and recent higher inflation readings only add to our conviction to be tactically long JPY,” said Paul Robson, head of G10 FX strategy at NatWest Markets.

“We’ve turned tactically bearish the USD and initiated short positions vs both EUR and JPY,” he added. “Our short-term fair value model suggests EUR/USD is too low based on bond spreads and relative curve steepness.”

The dollar was off at 146.84 yen, having shed 2 percent last week to a five-week low of 146.48.

The euro was holding firm at $1.0939, after bouncing 0.9 percent last week to as high as $1.0980.

The decline in the dollar and bond yields has been supportive of non-yielding gold which was up at $2,180 an ounce, having surged 4.5% last week to record peaks.

Oil prices have had a tougher time as worries about China’s demand offset supply cuts by producer group OPEC+.

Brent dipped 27 cents to $81.81 a barrel, while U.S. crude edged down 23 cents to $77.78 per barrel.