Asian stocks fall, dollar advances amid wavering rate cut expectations

Asian stocks fell on Friday, while the dollar advanced as strong US economic data bolstered the prospect of interest rates staying higher for longer and the Federal Reserve taking its time in cutting rates, keeping investors away from risky assets.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 per cent and was on course for a 1 per cent weekly decline, snapping its four-week winning streak. Japan's Nikkei fell 1.45 per cent.

China stocks were little changed in early trading, with the blue chip stocks 0.05 per cent lower as China's military started its second day of war games around Taiwan on Friday. Hong Kong's Hang Seng Index was 0.33 per cent lower.

Data on Thursday showed US jobless claims dropped while S&P Global's Flash PMI survey showed business activity expanded faster than economists forecast in May.

The robust economic data along with hawkish minutes from the Fed's last meeting earlier in the week has led traders to dial back their bets on rate cuts this year, with markets now pricing in just 35 basis points of easing in 2024, versus expectations of 150 bps of cuts at the start of the year.

Markets are now fully pricing in a rate cut in December with a cut in September now a coin toss, CME FedWatch tool showed.

"This week's data reaffirms the Fed simply does not have the capacity to provide policy accommodation," said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.

"The market and the Fed will just have to wait until there are labour market cracks to begin easing and right now there is little evidence that this is the case."

Atlanta Fed President Raphael Bostic said the US central bank may need to wait longer to cut interest rates because even with April's slightly cooler inflation reading there is continued upward pressure on prices.

The changing expectations around US rates has lifted yields, with benchmark US 10-year yield touching a more than one-week peak of 4.498 per cent on Thursday. It was last at 4.463 per cent in early Asian hours on Friday.

The dollar has also benefited, with the dollar index, which measures the US currency against a basket of six major peers, up nearly 0.6 per cent on the week to 105.06, on course for its largest one-week rise since mid-April.

The dollar's ascent has kept the pressure on the yen. The Japanese currency was last at 157.03 per dollar, not far from the over three week low of 157.19 touched on Thursday.

Japan's core inflation slowed for a second straight month in April due to milder food inflation while staying comfortably above the central bank's 2 per cent target, government data showed on Friday.

Bank of Japan Governor Kazuo Ueda said on Thursday the economy was on track for a moderate recovery, suggesting a slump in first-quarter gross domestic product alone would not keep the central bank from raising interest rates in coming months.

"We believe that the Bank of Japan will leave its stance unchanged at its June meeting as they would like to confirm the turnaround in economic growth, particularly in private spending and wage growth, that may be seen in July," said ING economists.

Sterling was muted on Friday at $1.2694, having touched a two month high of $1.2761 on Wednesday as traders ponder rates outlook in the wake of data this week showing inflation did not slow as much as expected in April.

The start of the election campaigns of British Prime Minister Rishi Sunak and his Labour Party rival Keir Starmer, drew eyes on Thursday though analysts said the poll was unlikely to have a major effect on markets.

In commodities, oil prices were steady, with Brent crude at $81.39 a barrel. US West Texas Intermediate crude (WTI) futures were at $76.87.

Gold prices rose 0.24 per cent to $2334.16 per ounce but are set for a 3.3 per cent decline for the week since late September.