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TOKYO (Reuters) – Asian stocks rose for a fifth straight day on Friday, on course for their best week this year, as cooling U.S. inflation stoked speculation that the Federal Reserve could pause rate hikes after this month.
The dollar sank to a fresh 15-month low against major peers and U.S. Treasury yields languished near multi-week lows following the sharpest weekly drop in four months.
Gold was poised for its best week in three months as the dollar floundered, while crude oil rose to the highest in nearly three months.
While money market traders still see a quarter-point bump to the Fed funds rate on July 26 as close to a sure thing, they have reduced the chances of another this year to just 1-in-5.
Data on Thursday showed the smallest increase in U.S. factory gate prices in nearly three years, reinforcing the milder inflation outlook after a report the previous day showing the slowest pace for consumer price growth in more than two years.
“What it means is we’ve got the Fed with its chest pretty much crossing the finish line at the end of the most aggressive tightening cycle in four decades, so it does warrant the rapid repricing that we’ve seen in many of these asset classes,” said Tony Sycamore, a market analyst at IG in Sydney.
“The equity market absolutely took off, and the dollar is under intense pressure.”
MSCI’s broadest index of Asia-Pacific shares outside Japan rallied 0.86% on Friday to put it on track for a 5.6% weekly advance, the biggest in eight months.
South Korea’s Kospi and Taiwan’s benchmark each jumped about 1.2%, while Australian shares gained 0.85%.
Hong Kong’s Hang Seng added 0.25% and mainland Chinese blue chips rose 0.17%.
Japan’s Nikkei was last up 0.19% in a rollercoaster session as the index struggles to find its feet following its retreat from a 33-year peak reached at the start of this month.
U.S. E-mini equity futures also pointed to a slightly lower restart for the S&P 500, after the index rallied 0.85% overnight.
U.K. FTSE futures slipped 0.24% and German DAX futures edged 0.12% lower.
Meanwhile, the U.S. dollar index – which measures the currency against six major peers – declined as much as 0.17% to touch 99.574 for the first time since April of last year.
“The dollar index can probably trade down toward 98 over the coming weeks without too many problems,” said IG’s Sycamore. “I wouldn’t be fighting that trend.”
U.S. two-year Treasury yields, which tend to be most sensitive to the Fed policy outlook, languished at 4.65%, following a 28 basis point slide this week that extended its drop from last week’s 16-year peak above 5%.
Ten-year yields wallowed around 3.78% following a 27 basis point decline since last Friday, when it reached an eight-month high at 4.094%.
Japan’s bond market sold off though, with the 10-year yield rising as high as 0.485%, taking it the closest it’s been to the Bank of Japan’s 0.5% policy ceiling since March 10.
Speculation that the BOJ could widen its 10-year yield band this month has been rising since a labour report a week ago showed solid growth in wages.
“The market has frontloaded its expectations for BoJ policy revisions,” Shinji Ebihara, an analyst at Barclays in Tokyo, wrote in a research report.
“However, such an abrupt repricing appears to be an overshoot in light of current BOJ communications and domestic fundamentals,” he said. “We believe the risk ultimately remains skewed toward lower yields.”
In Australia, the government’s appointment of deputy governor Michele Bullock to lead the Reserve Bank of Australia from mid-September had little effect on markets.
The Aussie dollar was flat at $0.6892, following back-to-back sessions of 1.5% gains against its U.S. peer to take it to the highest in a month.
In commodities, gold edged to a new one-month high at $1,963.59, buoyed by the dollar’s weakness. It has rallied about 1.9% this week.
Brent crude futures added 5 cents, or 0.1%, to $81.41 per barrel. U.S. West Texas Intermediate crude futures rose 9 cents, or 0.1%, to $76.98.
Both benchmarks are on track to settle higher for a fourth session in a row.
