Ankur Banerjee
SINGAPORE (Reuters) – Asian shares rose to a three-week high on Wednesday, helped by gains in technology shares, while the dollar weakened after weak U.S. retail sales data strengthened expectations that the Federal Reserve will cut interest rates this year.
MSCI’s index of Asia-Pacific stocks ex-Japan rose 0.72%, while technology shares in the region rose 1.6% to a record high.
Japan’s Nikkei rose 0.59%, while China’s blue chips fell 0.42%. Hong Kong’s Hang Seng Index rose 1.3%.
U.S. retail sales barely grew in May and data for the previous month was revised down sharply, according to data released Tuesday, suggesting economic activity will remain sluggish in the second quarter.
The data slightly increased expectations for a September rate cut, with traders now pricing in a 67% chance of a cut from 61% a day earlier, according to the CME FedWatch tool. The market is pricing in a 48 basis point cut this year.
“The Fed will need more data to support its case for a rate cut and investors should not overreact to one or two pieces of data,” said Basu Menon, managing director of investment strategy at OCBC.
In response to modest U.S. inflation data last week, Fed officials struck a generally more hawkish tone, lowering their previous median forecast of three quarter-point rate cuts this year to one.
“While 2025 is the more likely scenario for a rate cut, the uncertainty over 2024 remains ok as expectations of bigger rate cuts over the next two years will continue to support the market,” Menon said.
Encouraged by recent data, Fed officials are treading cautiously along the lines of widespread expectations for one or two rate cuts by the end of the year, waiting for further confirmation that inflation is slowing and warning signs from a still-strong labor market.
The S&P 500 and Nasdaq closed at all-time highs on Tuesday, and Nvidia overtook tech giant Microsoft to become the world’s most valuable company. [.N]
U.S. markets are closed on Wednesday, so trading is expected to be slow throughout the day.
In currency markets, the dollar index, which compares the greenback against six major currencies, was last trading at 105.29, while the euro was stable at $1.0738.
The European single currency is under pressure after French President Emmanuel Macron called for early general elections following a crushing defeat for the ruling centrist party in European Parliament elections.
The pound was flat at $1.2704 at the start of trading ahead of the Bank of England’s (BoE) policy decision on Thursday and U.K. inflation data due later in the day. The Bank of England is widely expected to keep interest rates unchanged.
The inflation report is expected to show that UK inflation fell to the Bank of England’s target of 2% in May, from 2.3% in April.
Kyle Chapman, currency markets analyst at Ballinger Group, said the May inflation report, due out on Wednesday, would be the deciding factor, with a rate cut still possible if services inflation gets back on track.
“Unless share prices collapse, I think it will take some evidence to convince the Bank of England that share prices are sustainably falling,” he said.
In Asia, the Japanese yen was little changed at 157.83 to the dollar, hovering near last week’s six-week low of 158.255. The yen remains under pressure from the widening interest rate differential between Japan and the United States.
Minutes of the Bank of Japan’s April policy meeting showed policymakers discussed the impact of a weaker yen on prices, with some suggesting they might raise interest rates sooner than expected if inflation exceeded expectations.
In commodity markets, oil prices were volatile as fears of escalating conflict between Russia and Ukraine and in the Middle East offset demand concerns following an unexpected rise in U.S. crude oil inventories. [O/R]
(Reporting by Anker Banerjee and Jamie Freed Editing by
