Asian Stocks Slip as US CPI, Fed Fuel Caution: Markets Wrap

(Bloomberg) — Contracts for European equities ticked higher while Asian stocks slipped, as the double-whammy of an upcoming US inflation report and the Federal Reserve decision kept traders on edge.

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Hong Kong’s equity benchmark fell more than 1%, with auto shares leading the decline ahead of Europe’s tariff decision. Stocks also dropped in Japan while gauges in India headed for new record highs. The Euro Stoxx 50 futures climbed 0.3% and contracts for US shares were little changed after the S&P 500 closed at a new high.

A Bloomberg index of dollar strength extended its advance to the fifth session, hovering near this year’s high. Treasuries steadied after rising on a solid $39 billion sale, which reflected speculation that Wednesday’s inflation reading will help make the case for the Fed to cut rates this year.

“The Fed must gain conviction that inflation is firmly headed toward its target before it cuts. So it’s likely that more convincing evidence of disinflationary tendencies might be necessary,” said Naomi Fink, global strategist at Nikko Asset Management. “Our view as a firm is for the Fed to be able to implement one rate cut this year.”

In key Asian data, China’s consumer price gains held above zero in May while factory-gate prices remained stuck in deflation, fueling concerns over persistently weak demand. Separately, the Biden administration is said to be considering further restrictions on China’s access to chip technology used for artificial intelligence.

“China markets are in need of a fresh catalyst after the impact on sentiment from the previous measures has worn off, and it’s looking increasingly difficult for China to announce policy easing with Fed rate cuts being delayed.” said Charu Chanana, a strategist at Saxo Capital Markets. “Despite the tech sector optimism sustaining, markets are turning slightly cautious ahead of the event risks from the US CPI and FOMC announcement today.”

US monetary policy continues to be the single most critical input for traders in Asia even with India’s post-election volatility, central banks in Japan and Taiwan gearing up for their own rate decisions and various Southeast Asian currencies testing key support levels.

The Fed is widely expected to hold borrowing costs at a two-decade high on Wednesday, but there’s less certainty on officials’ quarterly rate projections, known as the “dot plot.”

The projections “could potentially be a major market moving event especially if the dots only show one rate cut in 2024 instead of two which seems to be the street consensus view,” said Nomura strategist Chetan Seth.

The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version, according to Bloomberg Economics. The economists expect the May CPI print to give the Fed some additional reassurance that inflation is slowing.

In commodities, oil extended gains after industry data pointed to shrinking US crude stockpiles ahead of a report from the IEA on the market outlook. Iron ore climbed for the first time in three days, rising from the lowest level since April, buoyed by cautious optimism over signs of recovery in China’s property market.

Key events this week:

Germany CPI, Wednesday
US CPI, Fed rate decision, Wednesday
G-7 leaders summit, June 13-15
Eurozone industrial production, Thursday
US PPI, initial jobless claims, Thursday
Tesla annual meeting, Thursday
New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
Bank of Japan’s monetary policy decision, Friday
Chicago Fed President Austan Goolsbee speaks, Friday
US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks