As US inflation cools, Asian stocks head for 5th straight month of gains

Asian stocks were on track for a fifth straight month of gains on Friday, bolstered by a growing view that cooling US inflation could prompt the Federal Reserve to ease rates this year, while the yen tumbled to a 38-year low against the dollar.

Friday is packed with risk events for markets after a relatively subdued week, with figures for May's US core personal consumption expenditures (PCE) price index - the Fed's preferred measure of inflation - taking centre stage later in the day.

Asian markets were little fazed by the first US presidential debate between Democratic President Joe Biden and his Republican rival Donald Trump ahead of the November election, though US stock futures and the dollar rose as investors narrowed the odds on a Trump win.

"There's a big debate on whether that would be good news or bad news for equity markets, but I can tell you that for bond markets, the consensus is clear. If Trump were to win the election, interest rates would likely increase," said Andrew Lilley, chief interest rate strategist at Barrenjoey.

S&P 500 futures and Nasdaq futures both ticked higher, rising 0.23 per cent and 0.38 per cent, respectively.

EUROSTOXX 50 futures gained 0.32 per cent, while FTSE futures advanced 0.27 per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 per cent and was on track to gain more than 3 per cent for the month, its best performance since February.

Growing expectations of imminent Fed easing and momentum from the artificial intelligence boom have sparked a risk rally across stock markets and catapulted Wall Street to record highs, in turn lifting Asian shares.

Traders are now pricing in a 64 per cent chance of a first Fed cut in September, up from 50 per cent a month ago, according to the CME FedWatch tool, though analysts said those expectations could be derailed if Friday's core PCE figures surprise to the upside.

"If tonight's core PCE inflation were to come in much hotter than the 2.6 per cent expected and after upside surprises to Canadian and Australian inflation data this week, it would inflame concerns that the decline in global inflation has bottomed out and may have reaccelerated in some countries," said Tony Sycamore, a market analyst at IG.

Chinese markets, meanwhile, reversed early losses to trade higher, with China's benchmark CSI300 last up 0.64 per cent. Hong Kong's Hang Seng Index gained 0.56 per cent.

Investors were initially nervous over what Biden and Trump might say about trade relations with China, which have further soured in recent years, but the two offered little insight as to whether any further tariffs were on the cards.

In currency markets, the dollar was on the front foot and was eyeing a monthly gain of nearly 1.4 per cent against a basket of currencies.

The Aussie fell 0.38 per cent to $0.6623, while the euro dipped 0.16 per cent to $1.0686 and was headed for a monthly decline of roughly 1.5 per cent.

The common currency continues to be weighed by political turmoil in the bloc, with France's snap election due to kick off this weekend.

YEN FRAGILE

The yen tumbled to a trough of 161.27 per dollar, its weakest since 1986.

The Japanese currency has fallen some 2.3 per cent this month and more than 12 per cent for the year against a resilient dollar, as it continues to be hammered by stark interest rate differentials between the US and Japan, which has maintained the appeal of using the yen as a funding currency for carry trades.

In a carry trade, an investor borrows in a currency with low interest rates and invests the proceeds in higher-yielding assets.

The latest decline in the Japanese currency has kept investors on edge, watching for possible intervention from Tokyo. Japanese authorities spent 9.79 trillion yen ($60.94 billion) at the end of April and in early May to push the yen up 5 per cent from its 34-year low of 160.245 then.

"While the level of yen is one factor to consider, officials do focus on the pace of depreciation as the intent of intervention is to curb excessive volatility," said Christopher Wong, a currency strategist at OCBC.

"I think they may just hold on a little more ... unless we get a rapid move to 164-165," he said.

The yen's weakness has, meanwhile, been a boon for the Nikkei, which last rose 0.8 per cent. It was eyeing a monthly gain of about 3 per cent.

Data on Friday showed core consumer prices in Japan's capital rose 2.1 per cent in June from a year earlier, highlighting the challenge the Bank of Japan faces in timing its next interest rate hike, as cost pressures from the weak yen keep inflation above its 2 per cent target but also hurt consumption.

Also on Friday, Japan's government appointed financial regulation expert Atsushi Mimura as its top currency diplomat, replacing Masato Kanda who battled sharp yen declines this year with the biggest currency intervention on record.

In commodity markets, gold struggled under the pressure of a firm dollar and fell 0.3 per cent to $2,320.40 an ounce. [GOL/]

Brent crude oil futures rose 0.47 per cent to $86.80 a barrel, while US West Texas Intermediate crude futures gained 0.57 per cent to $82.21 per barrel.

(Reporting by Rae Wee in Singapore and Stella Qiu in Sydney; Editing by Jamie Freed, Jacqueline Wong and Kim Coghill)