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Asia shares edge lower on rate hike worries, yen frail

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A woman walks past a screen displaying the Hang Seng Index at Central district, in Hong Kong, China March 17, 2023. REUTERS/Tyrone Siu

Asian stocks eased on Friday after a set of strong U.S. economic data bolstered the view that the Federal Reserve will likely keep interest rates higher for longer, while the yen breached a psychologically important barrier amid intervention worries.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) eased 0.21% but was on course to eke out a gain of over 1% in the first half of the year.

Australia’s S&P/ASX 200 index (.AXJO) lost 0.39%, while Japan’s Nikkei (.N225) fell nearly 1%, but was easily the best performing Asian stock market with a 26% gain in the first six months of the year.

China shares have been on a rough ride, with investors cautious of the stuttering post-COVID-19 recovery as they wait for signs of a strong stimulus.

The country’s manufacturing activity contracted for a third straight month in June, albeit at a slower pace, an official factory survey showed on Friday.

China’s blue-chip CSI300 Index (.CSI300) fell 0.14% and the Shanghai Composite Index (.SSEC) eased 0.11%. Hong Kong’s Hang Seng Index (.HSI) slipped 0.28%, on course to clock a decline of 5% for the first half of the year.

Data through the week has painted a picture of a resilient U.S. economy that has eased some of the worries of an impending recession but they have also stoked expectations that the Fed will stay on its hawkish path.

The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to continued labour market strength.

Gross domestic product increased at a 2.0% annualised rate last quarter, the Commerce Department said in its third estimate of first-quarter GDP on Thursday. Economists had expected first-quarter GDP growth would be raised slightly to a 1.4% pace.

Ryan Brandham, head of global capital markets, North America at Validus Risk Management, said the data highlights the continued resilience of the U.S. consumer despite a long rate hiking cycle over the last 18 months.

The data “will have traders likely consider a greater likelihood of further interest rate hikes from the Fed.”

Markets are pricing in an 88% chance of the Fed raising rates by 25 basis points next month, according to CME FedWatch data.

Federal Reserve Chair Jerome Powell signaled on Thursday that the U.S. central bank was likely to resume its monetary tightening campaign after a break earlier this month.

“We did take one meeting where we didn’t move,” Powell said during an event held by the Spanish central bank in Madrid. “We expect the moderate pace of interest rate decisions to continue.”

The strong economic data sent Treasury yields higher, with the yield on 10-year Treasury notes touching a three-month high of 3.868% on Thursday. In Asian hours, it was at 3.840%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was at 4.872%, having touched more than a three-month high of 4.892% overnight.

Investor focus on Friday will be on the U.S. Personal Consumption Expenditures (PCE) index reading, the Fed’s favoured inflation gauge.

In the Eurozone, inflation data for May will likely provide cues to the European Central Bank’s next moves.

“There is a growing divergence in the path of inflation across the region, which is leading to some disagreement about the right path for policy,” said Rob Carnell, ING’s regional head of research, Asia-Pacific.

“Though one suspects that the response will be, if in doubt, hike.”

Japanese authorities are under pressure to combat a continued yen fall driven by market expectations that the Bank of Japan will keep interest rates ultra-low, even as other central banks tighten monetary policy to curb inflation.

On Friday, the Japanese yen weakened to 145 per dollar for the first time since November as investors watch out for intervention from the Japanese authorities.

In a fresh warning, Japanese Finance Minister Shunichi Suzuki said on Thursday the country will not rule out any options in responding to currency market moves that become excessive, adding that one-sided, unstable yen moves were undesirable.

The dollar index , which measures the U.S. currency against six rivals, rose 0.029%, with the euro down 0.01% to $1.0863.

U.S. crude fell 0.21% to $69.71 per barrel and Brent was at $74.30, down 0.05% on the day.

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