(Bloomberg) — Asian shares fell on Wednesday ahead of a key inflation report and the US debt ceiling standoff weighed on investor sentiment.
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An equity benchmark for the sector was down nearly 0.5%, putting it on course for its biggest loss in more than two weeks. The S&P 500 and Nasdaq 100 contracts were partially higher in Asia after falling 0.5% and 0.7%, respectively, on Tuesday.
US gauges remained stuck in narrow trading ranges as investors weighed the potential end of the Federal Reserve’s interest rate hikes against the prospect of an economic recession. It’s a similar story for stocks globally, which have turned largely sideways for more than a month as measured by the MSCI World Index.
The dollar weakened marginally against all its Group-of-10 peers. The Australian currency posted a small gain on Tuesday after falling 0.3% after the government flagged a budget surplus that could help ease inflation. Bond yields ticked higher in Australia.
Treasury yields held steady after a muted reaction in futures markets after President Joe Biden and congressional Republicans made little concrete progress toward averting a US default for the first time. He promised to meet again on Friday with Biden and House Speaker Kevin McCarthy to discuss spending, which would open the door to a possible agreement.
“I don’t think there is likely to be any market reaction until closer to the X-date – it is still a moving target, possibly in June and possibly later in July,” said Jason Wong, currency strategist at Bank of New Zealand Ltd. “Meanwhile, the headlines around the talks are more noise and mostly market-neutral than indicative.”
While the impact of the debt talks has been relatively mild on Wednesday, it casts a long shadow over the markets. Some of Wall Street’s most experienced traders have warned of the “unimaginable” long-term damage of a US default.
Yields on Treasury bills in early June led rates on short-term securities to rise as both Biden and McCarthy rejected a short-term extension of the debt ceiling. The Treasury has also cut the size of the four- and eight-week auctions as it looks to reduce the size of sales for these types of securities amid the standoff.
The US inflation report due later on Wednesday is also a matter of concern for the market. Headline CPI is expected to show a 5% increase on a year-over-year basis in April, indicating that price pressures are still uncomfortably high for the Fed. This will be followed by consumer and producer price data from China on Thursday, which are expected to ease inflationary pressures in the Asian powerhouse.
Fed officials, including New York chief John Williams, are watching for signs of a credit crunch. Williams said he was not including a rate cut in his forecast for this year at an event on Tuesday. He left the door open on the possibility of a Fed pause. Swaps suggest that traders are expecting a cut of at least 50 basis points by the end of 2023.
Still, some investors aren’t about to change their investment strategies based on this week’s developments.
Nomura Holdings Inc. Chetan Seth, an equity strategist at RBI, told Bloomberg Television that there will be another inflation report and payrolls data before the next Fed rate decision in mid-June. “I don’t think there’s any temptation from our side to really stick our necks out and say, ‘Hey, you know what, this really changes the picture’,” he said.
Elsewhere in markets, oil held off its recent rally after the Biden administration announced plans to replenish strategic reserves. Gold turned volatile and bitcoin was trading below $28,000.
Major events of the week:
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US CPI, Wednesday
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China PPI, CPI, Thursday
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UK BOE Rate Decision, Industrial Production, GDP, Thursday
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US PPI, Initial Jobless Claims, Thursday
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A group of seven finance ministers and central bank governors met in Japan on Thursday.
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US University of Michigan Consumer Sentiment, Friday
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Fed Governor Philip Jefferson and St. Louis Fed President James Bullard participated in a panel discussion on monetary policy at Stanford University on Friday.
Some key moves in the markets:
shares
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S&P 500 futures were up 0.1% as of 10:46 a.m. Tokyo time. The S&P 500 fell 0.5% on Tuesday
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Nasdaq 100 futures were little changed. Nasdaq 100 fell 0.7%
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Japan’s Topix index fell 0.4%
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Hong Kong’s Hang Seng index fell 0.7%
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China’s Shanghai Composite Index fell 0.6%
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Australia’s S&P/ASX 200 index fell 0.2%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0971
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The Japanese yen was little changed at 135.17 per dollar
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The offshore yuan was little changed at 6.9289 per dollar.
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The Australian dollar was little changed at $0.6765
cryptocurrency
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Bitcoin rose 0.1% to $27,700.1
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Ether was little changed at $1,850.55
bond
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The yield on the 10-year Treasury declined one basis point to 3.51%
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Japan’s 10-year yield declined 0.5 basis points to 0.415%
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Australia’s 10-year yield rose one basis point to 3.46%
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This story was produced with assistance from Bloomberg Automation.
— With assistance from Peyton Forte, Kristin Flanagan and Ruth Carson.
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