Stocks in Asia Rise, Dollar Slips as Traders Anticipate US Inflation Data

Asian Shares Surge, Dollar Declines Ahead of Crucial US Inflation Report

According to reports from Reuters, Asian shares are on the rise while the dollar is slipping to a two-month low on Wednesday. Investors are eagerly awaiting a crucial U.S. inflation report, which will provide valuable insights into whether the Federal Reserve is nearing the end of its aggressive rate-hiking policy. The outcome of this report will play a significant role in shaping market expectations and investor sentiment.

Positive Indications for European Markets

Futures suggest that the risk-on rally will likely continue in Europe, with Eurostoxx 50 futures up by 0.44%, German DAX futures showing a 0.36% increase, and FTSE futures up by 0.30%. These positive indications set the stage for potential gains in the European markets.

Asia-Pacific Shares Continue to Strengthen

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) has surged by 0.77%, marking its third consecutive day of gains. The index is currently up by 2% for the week, positioning itself for the best weekly gain in a month. This upward trend reflects improving investor sentiment and a growing regional appetite for risk.

Focus on the Inflation Report

Investors are closely focused on the forthcoming inflation report, which is expected to be released later in the day. According to economists surveyed by Reuters, the consumer price index is anticipated to have risen by 3.1% in June, following a 4% increase in May (USCPNY=ECI). The core rate, excluding volatile food and energy prices, is projected to have dropped for the third consecutive month to 5% from 5.3%, though it remains above the Federal Reserve's target of 2%.

"I think there is a bit of nervousness ahead of the CPI," said Shane Oliver, head of investment strategy at AMP Capital. "There's optimism that it's going to show a further fall, but there's awareness, too, that core inflation has been sticky." This apprehension is driven by the market's recent strong performance and the potential need for a pause or consolidation.

Market Expectations and Rate Hike Probabilities

Market participants are currently pricing in a 92% chance of a 25-basis-point rate hike by the Federal Reserve later this month, according to the CME FedWatch tool. However, there are doubts about the likelihood of further rate hikes beyond that. Saxo Markets strategists suggest that if the core rate decelerates as expected, traders will likely keep the odds for rate hikes in September and November relatively low.

Federal Reserve's Stance on Interest Rates

Federal Reserve officials have expressed their intention to raise interest rates by at least another 50 basis points as they tackle persistent price pressures. Their commitment to controlling inflation and maintaining a balanced monetary policy continues to shape market expectations.

Focus on Bank of Canada's Policy Decision

Investor attention will also be on the policy decision from the Bank of Canada, with analysts predicting a second consecutive quarter-point interest rate hike. In June, the central bank raised its overnight rate to a 22-year high of 4.75% after a five-month pause, citing the need for less restrictive monetary policy. The decision to make further moves will depend on economic data.

Concerns Over Inflation's Long-Term Impact

Some economists, like Betashares chief economist David Bassanese, caution that it is still unclear whether a recession will ultimately be necessary to reduce inflation sustainably. He highlights tight labor markets and stubborn service sector inflation rates as factors contributing to this uncertainty. Bassanese emphasizes that central banks are concerned about the potential risk of entrenched inflation if it takes longer to bring it down.

Mixed Performance in Asian Markets

In Asia, Australia's S&P/ASX 200 index (.AXJO) has risen by 0.42%, indicating positive sentiment in the market. However, Japan's Nikkei (.N225) has experienced a decline of 0.7%. China shares (.SSEC) have eased by 0.30%, while Hong Kong's Hang Seng Index (.HSI) has risen by 1% in early trading. China's extension of policies to support the real estate sector until the end of 2024 has fueled expectations of additional stimulus measures.

Upcoming Second-Quarter Earnings Reports

This week, attention will also be on the second-quarter earnings reports from major Wall Street institutions, including JPMorgan (JPM.N), Citigroup (C.N), and Wells Fargo (WFC.N). Wall Street banks are expected to report higher quarterly profits despite declining dealmaking, largely due to rising interest payments.

Dollar Weakens in Currency Markets

The dollar index, which measures the U.S. currency against six major peers, has fallen by 0.167% to 101.43 in the currency market. At its lowest point, the index reached 101.34, the lowest level in two months. The Japanese yen has strengthened, rising nearly 4% from a seven-month low of 145.07 it reached last month. Traders were on alert for possible intervention from Japanese authorities at that level. The yen currently stands at 139.52 against the dollar, having reached its highest levels in a month earlier in the session. The New Zealand dollar experienced choppy trading and is up by 0.26% after the country's central bank decided to keep interest rates unchanged at 5.50%.

Stable Oil Prices

U.S. crude prices have risen slightly by 0.01% to $74.84 per barrel, while Brent remains flat at $79.40 per barrel. Stable oil prices indicate a relatively calm market and are influenced by various factors such as global supply and demand dynamics, geopolitical tensions, and market sentiment.

In summary, Asian stocks are gaining momentum while the dollar weakens ahead of the highly anticipated U.S. inflation report. Investor focus remains on the inflation data, as it will provide crucial insights into the Federal Reserve's monetary policy decisions. Additionally, the Bank of Canada's policy decision and upcoming earnings reports from major Wall Street institutions contribute to the market's current dynamics.