Asia stocks rally, bond yields fall as investors assess Fed outlook

Asian equities rallied on Thursday, while bond yields slid, as investors weighed cooling US inflation against a more hawkish posture by the Federal Reserve.

Japanese shares underperformed and the yen inched down against the dollar, as the Bank of Japan began its two-day policy meeting.

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.9 per cent, with Taiwan stocks jumping 1.7 per cent and Hong Kong's Hang Seng up nearly 1 per cent, buoyed by the US S&P 500 and tech-heavy Nasdaq closing at record highs overnight.

US futures pointed to further gains, with S&P futures up 0.2 per cent and Nasdaq futures adding 0.6 per cent.

Japan's Nikkei edged up 0.1 per cent after an initial tech-led advance fizzled.

Wall Street had rallied strongly, while the dollar and Treasury yields tumbled early in the US session, after the closely watched CPI report showed core prices growing at their slowest annual pace in over three years last month.

However, investors were whipsawed later as Fed officials trimmed projections for interest rate reductions this year to a single quarter-point cut.

In his post-meeting press conference, Fed Chair Jerome Powell acknowledged that inflation has eased substantially but still remains too high.

At the same time, he said the rate-path decision was a "close call" for many policymakers, and to some degree the Fed had merely traded an earlier start to rate reductions this year by tacking an additional anticipated cut onto 2025.

"These projections remain hostage to the incoming data, (and) on that front, the May consumer price index was a genuine dovish surprise," said Nick Ferres, chief investment officer at Vantage Point, Singapore.

"What really matters for markets is that today's prevailing bias on the 'soft-landing' narrative has probably peaked. That might contribute to a peak in equity prices sometime over the northern hemisphere summer."

The US 10-year Treasury yield was little changed at 4.31 per cent on Thursday, after starting Wednesday 10 basis points higher. It dipped as low as 4.25 per cent following the CPI surprise, its lowest since April 1.

Japan's government bond yields fell as much as 3 bps to 0.955 per cent for the first time since May 17.

The Nikkei newspaper reported that the BOJ is likely to debate a reduction in monthly bond purchases at its policy gathering ending Friday, echoing earlier reports from Reuters and other news outlets.

Daniel Hurley, a portfolio specialist at T. Rowe Price in Tokyo, said a reduction in JGB purchases is likely this week, and there is potential for a rate hike in July, but neither will really move the needle substantially for markets.

"We expect the BoJ to remain accommodative and dovish, (and) with that we expect the yen to remain relatively weak and determined by interest rate differentials globally... We remain constructive on Japanese equities."

The yen was a notable underperformer against the dollar overnight, while most other major currencies registered substantial gains.

The yen edged 0.14 per cent lower to 156.92 per dollar, erasing about half of Wednesday's 0.28 per cent advance.

Meanwhile, the euro held steady at $1.0808 after firming 0.64 per cent overnight.

The dollar index, which measures the US currency against the euro, yen and four other major peers, added 0.07 per cent to 104.76, following a 0.54 per cent slide on Wednesday.

Gold eased 0.3 per cent to $2,315.55 per ounce.

Crude oil fell slightly, under pressure following a bigger- than-expected rise in US stockpiles.

Brent crude futures lost 14 cents, or 0.17 per cent, to $82.46 a barrel, and US West Texas Intermediate (WTI) crude futures declined 16 cents, or 0.2 per cent, to hit $78.34. Both benchmarks had gained about 0.8 per cent in the previous session.