Japan’s Nikkei skids as bets of US rate hike grow
Japan’s Nikkei fell on Friday, erasing this week’s gains in the Asian session after weaker-than-expected spending data highlighted the inflation scourge as bets grew that the Bank of Japan would raise interest rates.
The Nikkei 225 fell 1.5 percent and was on track to end the week mostly flat. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.1 percent but still expects a 0.5 percent gain for the week.
Household spending in Japan unexpectedly fell at the fastest pace in nearly two years in October as inflation sapped people’s spending power, data showed. The yield on 10-year Japanese government bonds reached 1.94 percent in early Asia, its highest level since mid-2007.
Benchmark bond yields have been on track to rise 13.5 basis points this week, marking the steepest five-day climb since March, but strong recent auction results have suggested cheap bond prices are drawing buyers into the market.
“In previous cycles, moves of this magnitude would have shaken markets. Instead, demand has strengthened,” said deVere Group CEO Nigel Green.
“Capital flows are shifting, long-held expectations are being tested, and portfolios built permanently around the cheap yen now face a very different world.”
The yen was steady at 155 per dollar, well above its 10-month low of 157.9.
The Bank of Japan’s quarter-point rate hike later this month is currently priced at 75 percent after Governor Kazuo Ueda told investors on Monday that the central bank would weigh the “pros and cons” of raising interest rates.
Sources told Reuters that the Japanese government is ready to tolerate an increase in December.
In other markets, stocks were mostly flat heading into the weekend. Australia’s resource-weighted shares were little changed. Hong Kong’s Hang Seng index lost 0.5 percent, while South Korea’s shares rose 0.7 percent.
In currency markets, the dollar was flat overnight after falling for nine straight sessions as traders awaited U.S. inflation data that could impact the Fed’s decision.
The dollar lost 0.1 percent against major currencies on Friday, falling to 99, and lost 0.5 percent throughout the week.
The US personal consumption expenditures (PCE) price index for September is due out later in the day – an outdated reading given that its release was delayed due to the US government shutdown. Forecasts focus on a 0.2 percent increase in the key indicator, with the annual rate remaining unchanged at 2.9 percent.
The US nonfarm payrolls report will not be released on Friday. Thursday’s data showed jobless claims fell last week, easing concerns about a sharp deterioration in the labor market, though that may be due to the Thanksgiving holiday.
Fed funds futures contracts are pricing in an almost 90 percent chance of a rate cut next Wednesday. This may be the most controversial decision ever for the Federal Reserve. Five of the 12 voting members publicly stated their opposition to lowering interest rates further.
“Tariffs have halted the recovery in inflation this year, but we believe the disinflationary framework remains solid,” analysts at ANZ said.
“This framework includes a softening labor market, moderate wage growth, well-anchored long-term inflation expectations… We think the data will support an FOMC rate cut next week.”
Treasury bond yields fell slightly on Friday after rising the previous day. The yield on two-year Treasury bonds rose five basis points overnight and fell one basis point to 3.519 percent, while the yield on 10-year Treasury bonds fell two basis points to 4.092 percent after rising five basis points overnight.
Brent crude futures were flat on Friday and will end the week largely unchanged.
Spot gold prices will end the week down 0.8 per cent at US$4,198 ($A6,344) per ounce.
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