GLOBAL MARKETS-Asia stocks rally on renewed global rate cut optimism

SINGAPORE: Asian stocks rose on Friday, on course for a third week of gains, while the dollar was on the back foot as fresh signs of an easing U.S. labor market stoked optimism around interest rate cuts this year ahead of next week's crucial inflation data. Sterling was steady at $1.2515, having touched over two-week low of $1.2446 on Thursday after Bank of England (BOE) paved the way for the start of rate cuts as soon as next month.

Asian stocks rose on Friday, on course for a third week of gains, while the dollar was on the back foot as fresh signs of an easing U.S. labor market stoked optimism around interest rate cuts this year ahead of next week's crucial inflation data.

Sterling was steady at $1.2515, having touched over two-week low of $1.2446 on Thursday after Bank of England (BoE) paved the way for the start of rate cuts as soon as next month. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.66% and was on course for a nearly 1% gain for the week, its third straight week of gains. Japan's Nikkei was 1.6% higher.

China stocks also gained, with blue-chip shares 0.14% higher, while Hong Kong's Hang Seng Index rose 1.4%, having touched an eight month high in early trading. Data on Thursday showed U.S. initial claims for state unemployment benefits increased more than expected by 22,000 to a seasonally adjusted 231,000 for the week ended May 4, the Labor Department said.

The figures follow last week's report showing U.S. job growth slowed more than expected in April and the increase in annual wages fell below 4.0% for the first time in nearly three years. "After a period of remarkable strength and resilience, signs are growing that the U.S. labor market may be starting to soften," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

Brandham said the softer labor market should help the Fed in the fight against inflation, even if the central bank is hoping to tame prices without materially impacting the labor market. Markets will be closely watching April U.S. producer price index (PPI) and the consumer price index (CPI) out next week for signs that inflation has resumed its downward trend towards the Fed's 2% target rate.

Hotter-than-expected inflation reports last month knocked back any lingering expectations of interest rate cuts in the near term, with markets now fully pricing in a 25-basis-point rate cut only in November though there remains a chance of a cut in September. Traders now anticipate 47 bps of cuts this year from the Fed, drastically lower than the 150 bps they priced in at the start of 2024.

The shifting expectations around U.S. rates have kept the dollar adrift, with the euro holding to its 0.3% overnight gains and last at $1.0778. The single currency was on track for its fourth straight week of gains on the dollar. The dollar index, which measures the U.S. currency versus six peers, was little changed at 105.24.

BOE Governor Andrew Bailey said there could be more reductions than investors expect, with the central bank's move was the latest sign of the growing divergence between Europe and U.S. rate outlook, with interest rates expected to fall earlier and further across Europe than in the United States. Markets now imply a 50-50 chance of a BoE cut in June and are almost fully priced for August. They also imply an 88% chance the European Central Bank will ease in June.

The yen remains in the spotlight after last week's suspected rounds of interventions from Japanese authorities. It was last at 155.51 per dollar, with Japan's Finance Minister Shunichi Suzuki repeating Tokyo's recent warnings that it was ready to take action against disorderly currency moves. Data from Bank of Japan suggests Tokyo spent nearly $60 billion last week in suspected interventions to pull the yen off its 34-year lows of 106.245 per dollar. However, with the yen nudging its way up to the 155 levels, traders are once again on intervention alert.

Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, said the Ministry of Finance wants to avoid spikes in volatility which could negatively impact domestic financial markets. "So like we suspected a few days ago, they will intervene if intraday moves become too large. But I don't think they'll push against a steady depreciation, like we've seen since."

In commodities, oil prices were on the rise, with U.S. crude up 0.63% to $79.76 per barrel and Brent at $84.33, up 0.54% on the day. Spot gold added 0.3% to $2,352.92 an ounce.