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SINGAPORE (Reuters) – Asian stocks broadly fell on Thursday, hovering close to a one-month low, still reeling from China’s slip into deflation as investors looked ahead to a crucial U.S. inflation report that will likely influence the Federal Reserve’s policy path.
The announcement of a U.S. ban on investments in sensitive technologies in the world’s second-largest economy also weighed on sentiment.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.58% and looked set to log a second straight week of losses. A technology sub-index fell to its lowest in two months.
The dour mood in Asia is unlikely to continue with futures indicating that European stocks were set for a higher open. Eurostoxx 50 futures rose 0.69%, German DAX futures were up 0.70% and FTSE futures climbed 0.44%.
Investors have been unwilling to place major bets this week ahead of a U.S. inflation report due later on Thursday.
U.S. CPI is forecast to show headline inflation picking up slightly in July to an annual 3.3%, while the core rate, which excludes the volatile food and energy segments, is forecast to rise 0.2% in July, for an annual gain of 4.8%.
“We are likely to see something we haven’t seen for some time, namely, annual inflation rising,” said Rob Carnell, ING’s regional head of research, Asia-Pacific.
“The good news is that this is mainly due to base effects…the bad news is that this indicates that the going will be a lot heavier for inflation from now on, without those nice helpful base effects that dominated the second quarter.”
Markets are pricing in a more than 50% chance that the Fed is done with interest rate hikes this year, the CME FedWatch tool shows, as inflation moderates and the prospect of a soft landing increases.
CHINA WOES
Chinese data on Wednesday showing deflation at the consumer-price level and further declines for factory-gate prices in July, exacerbating concerns about the sputtering nature of the post-pandemic recovery.
China is the first G20 economy to report a year-on-year decline in consumer prices since Japan’s last negative headline CPI reading in August 2021.
It highlights “the need for more fiscal support, if Beijing wants to avoid the prospect of a deflationary trap,” said Rodrigo Catril, senior currency strategist at National Australia Bank.
On Thursday, China’s blue-chip CSI 300 Index fell 0.5% and the Shanghai Composite Index eased 0.2%, while Hong Kong’s Hang Seng Index retreated nearly 1%.
President Joe Biden on Wednesday signed an executive order that will prohibit some new U.S. investment in China in sensitive technologies like computer chips and require government notification in other tech sectors.
“This signifies unprecedented federal oversight to scrutinise and sometimes hinder such investments in China’s tech sector,” strategists at Saxo Markets said.
Meanwhile, the yield on 10-year Treasury notes was up 1.3 basis points to 4.020% in Asian hours, while the yield on the 30-year Treasury bond was at 4.187%.
Bond strategists polled by Reuters expect U.S. Treasury yields to fall in the coming months, with the median forecast for the 10-year Treasury note yield at 3.60% in six months.
In the currency market, the dollar index, which measures U.S. currency against six peers, eased 0.02%. The Japanese yen weakened 0.20% to 144.01 per dollar, heading closer to the psychologically key 145 level.
Oil prices eased in Asian trade after touching seven-month peaks in the previous session, as higher U.S. crude inventory and sluggish economic data from China raised concerns about global fuel demand.
U.S. crude fell 0.07% to $84.34 per barrel and Brent was at $87.47, down 0.09% on the day. [O/R]
Focus will be on the where gas prices head after Dutch gas prices hit a nearly two-month intraday high on Wednesday as news of possible strikes at Australian liquefied natural gas (LNG) facilities sparked concerns over cargoes moving to Asia.
The rise of key energy markets has many investors concerned that we are headed for another round of inflation, which could lead to higher interest rates for a longer period of time, said Matt Simpson, a market analyst at City Index.
