Written by Kevin Buckland
TOKYO (Reuters) – Better-than-expected U.S. inflation set back bets on the timing and frequency of the Federal Reserve's interest rate cuts, following a tech-led Wall Street sell-off overnight on Friday. Asian stocks fell.
Benchmark U.S. bond yields held near the 4.3% level hit for the first time this month on Thursday, after their biggest rise in three months. The dollar rose against a basket of major peers to its highest since March 5.
Oil rose above $85 overnight for the first time since November before falling back, but remaining on track to rise nearly 4% this week.
Bitcoin has been slowly rebounding towards the all-time high it hit on Thursday.
Futures markets lowered the probability of June policy easing to 60% from about 67% late Wednesday after overnight US data showed producer prices were higher than expected, leading to a decline in consumer inflation at the start of the week. The view became even more heated. According to LSEG's rate probability app. Markets are currently pricing in less than three rate cuts for 2024, down from three to four cuts about two weeks ago.
The biggest reaction was in the U.S. Treasury market, where a jump in yields also dragged on the dollar.
The yield on the 10-year Treasury note was around 4.28% on Friday, preserving most of the 10-plus basis point increase from the previous session.
The dollar index, which measures the dollar against the euro, yen and four other currencies, rose 0.07% to 103.45, following Thursday's 0.58% rise.
“Price pressures are becoming more stubborn at the breaking point, and the process of defusing inflation is taking longer than expected,” said Kyle Rodda, senior market analyst at Capital.com.
Although the direct impact on equities has been muted, the jump in long-term yields “raises concerns about a potential air pocket in the tech-driven rally,” he said.
U.S. stock futures edged lower after the S&P 500 index fell 0.29% on Thursday. However, the impact of the sharp decline in semiconductor sector stocks affected the Asian market, putting pressure on the region's stock indexes.
Hong Kong's Hang Seng fell more than 1%, and South Korea's Kospi fell as well.
But mainland Chinese blue-chip stocks were little changed despite the People's Bank of China's decision on Friday to keep medium-term lending rates unchanged.
Japan's Nikkei Stock Average fell 0.3%.
Signs of an exit from ultra-easy stimulus continue to mount at the Bank of Japan's two-day policy meeting, which ends next Tuesday.
The government appears to be backing the policy change, with Finance Minister Shunichi Suzuki saying on Friday that the economy was slowing despite saying earlier in the week that it was too early to declare an end to the prolonged downward price spiral. He said that there is no longer deflation.
Jiji Press reported on Thursday that the Bank of Japan began making adjustments toward lifting its negative interest rate policy at a meeting. Sources told Reuters that the central bank will discuss ending negative interest rates if a preliminary investigation into wage negotiations by major companies, scheduled for Friday, yields positive results.
Japan's 10-year bond yield rose to 0.795% for the first time in three months.
The yen's strength was overwhelmed by the dollar's recovery, with the dollar rising 0.11% to 148.48 yen, continuing its rebound from a drop to 146.48 yen a week ago.
The euro extended its decline on Thursday, hitting a one-week low of $1.08765. It rose to a two-month high of $1.0980 last Friday.
Among cryptocurrencies, Bitcoin rose 1.4% to $71,650, heading towards its previous all-time high of $73,192.79.
Software company MicroStrategy this week announced plans to raise capital through convertible debt, offering to buy Bitcoin for the second time within 10 days.
Elsewhere, oil prices on Friday saw some profit-taking after rising sharply this week on the back of sharp declines in U.S. crude and fuel inventories, drone attacks on Russian refineries and rising energy demand forecasts. I gave in. [O/R]
Brent crude oil futures for May fell 41 cents, or 0.5%, to $85.01 a barrel. U.S. West Texas Intermediate (WTI) crude oil for April delivery fell 32 cents, or 0.4%, to $80.94.
(Reporting by Kevin Buckland; Editing by Gerry Doyle)
