Markets cool off, Japan inflation on tap

A classic economic data case of ‘good news is bad news’ from the United States on Thursday looks set to weigh on Asian markets on Friday, as that eagerly awaited first US interest rate cut gets pushed back further into the distance.

A quarter-point rate cut from the Fed is now fully priced only in December, after the presidential election. It’s hard to believe now, but at the start of the year 150 basis points of easing was expected in 2024, starting in March.

Coming on the heels of a similar tempering of UK rate cut expectations and more hawkish signaling from New Zealand’s central bank this week, the prospect of tighter global policy in the coming months could be problematic for risk assets.

Stocks fell and bond yields rose on Thursday after figures showed that US business activity accelerated in May to the highest level in over two years, trumping yet another earnings ‘beat’ from AI and chipmaking giant Nvidia.

This should fuel risk appetite, but the US PMI report also showed price pressures rising rapidly. With many equity indexes historically high and volatility historically low, investors are choosing caution over adventure.

There are signs that some of the froth is coming off other markets – after hitting record highs on Monday, US copper prices are on track for a 5.5% decline this week, which would be the biggest fall since November 2022.

That’s the backdrop to the open in Asia on Friday. If markets close flat or lower, the MSCI Asia ex-Japan stock index will post its first weekly decline in five, China’s blue chip CSI300 its first fall in six weeks, and Hong Kong’s Hang Seng its biggest weekly loss since January.

Japanese inflation tops Friday’s economic data calendar, which also includes inflation from Malaysia, trade from New Zealand and industrial production from Singapore.

Annual core inflation in Japan is expected to fall to 2.2% in April from 2.6%, closer to the Bank of Japan’s 2% goal and perhaps enough to give policymakers some breathing room after Japanese Government Bond yields this week climbed to their highest in over a decade.

In Italy, G7 finance chiefs get a two-day meeting underway on Friday, with the trade standoff between China and the West high on the agenda.

And looking ahead to the weekend, South Korea hosts a two-day trilateral summit with China and Japan that starts on Sunday.

From a markets perspective, it will be interesting to see if discussions touch on trade competitiveness, AI and the chips sector, and exchange rates, after Japan and South Korea last month signed a rare joint statement with the United States to “consult closely” on currencies.

Here are key developments that could provide more direction to markets on Friday:

– Japan CPI (April)

– New Zealand trade (April)

– G7 finance chiefs meet in Italy

(Reporting by Jamie McGeever; Editing by Josie Kao)