Asia shares rise on hints Fed could slow pace of US rate hikes

Japan's Nikkei added 0.7 per cent and South Korea 0.8 per cent. PHOTO: REUTERS

SYDNEY (REUTERS) - Asian shares made cautious gains on Thursday (July 28) as investors scented a possible slowdown in the pace of US rate hikes, lowering bond yields and restraining the US dollar.

As expected, the United States Federal Reserve raised rates by 75 basis points to 2.25 per cent to 2.5 per cent but did note some softening in recent data.

Fed chair Jerome Powell sounded suitably hawkish on curbing inflation in his news conference, but also dropped guidance on the size of the next rate rise and noted that "at some point" it would be appropriate to slow down.

"The Fed no longer feels behind the curve and can now assess the appropriateness of policy 'meeting by meeting'," said Westpac senior economist Elliot Clarke.

"This is not to say that the rate hike cycle is complete or even that a pause is coming, but risks look as though they are transitioning from being skewed to the upside to the downside."

The futures market still has 100 basis points of further tightening priced in by year end, but also implies around 50 basis points of rate cuts over 2023.

Just the hint of a less aggressive Fed was enough to send MSCI's broadest index of Asia-Pacific shares outside Japan up 0.5 per cent. Japan's Nikkei added 0.7 per cent and South Korea's Kospi 0.8 per cent.

Singapore's Straits Times Index rose 0.3 per cent when trading opened.

Yet, shares of several major US tech companies, including Meta Platforms, also slid after hours as poor quarterly results and outlooks underscored recession fears.

That saw Nasdaq futures dip 0.4 per cent, having enjoyed their biggest daily gain since April 2020 on Wednesday, while S&P 500 futures eased 0.2 per cent.

Attention now switches to data on US gross domestic product for the second quarter where another negative reading would meet the technical definition of a recession, though the US has its own method of deciding that.

Median forecasts are for a growth of 0.5 per cent, but the closely watched Atlanta Fed estimate of GDP is for a fall of 1.2 per cent.

Euro still lacks energy

In bond markets, two-year Treasury yields steadied at 2.99 per cent after falling six basis points in the wake of the Fed meeting.

Although the yield curve steepened slightly, most of it remained inverted in a sign that investors believe policy tightening will lead to an economic downturn and lower inflation.

"While central banks are still on track to continue tightening this year, it is increasingly likely that the most rapid pace of rate hikes may be behind us," analysts at JPMorgan said in a note.

"Falling commodity prices, notably excluding European natural gas, should offer some inflation relief, and the global economy outside of China is losing momentum."

In currencies, the dollar index held at 106.360 after losing 0.7 per cent overnight as risk sentiment improved. It dipped to 136.18 yen and away from its recent peak of 139.38.

The euro hovered around US$1.02, having bounced 0.9 per cent overnight, but faces stiff resistance at US$1.0278.

The single currency still has an energy crisis to contend with as the International Monetary Fund warned that a complete cut-off of Russian gas to Europe by year end may lead to virtually zero economic growth next year.

Russia has delivered less gas to Europe this week and warned of further cuts to come, boosting prices for gas and oil globally.

US crude added another 54 cents to US$97.80 a barrel, having bounced 2.4 per cent overnight, while Brent gained 32 cents to US$106.94.

Spot gold was 0.3 per cent firmer at US$1,738 an ounce, having benefited from the dip in the dollar and bond yields.

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