Asia shares extend rally on hopes of early rate cuts

SYDNEY: Asian shares rallied for a fourth straight session on Monday after markets moved to price in earlier rate cuts in the United States and Europe, bullish wagers that will be tested by a swarm of central bank speakers this week.

Battered bond markets also enjoyed a welcome recovery as a benign U.S. payrolls report and upbeat productivity numbers suggested the labour market was cooling enough to obviate the need for further rate hikes from the Federal Reserve. "This year's better-than-expected U.S. supply-side performance raises hopes for a soft landing," said Bruce Kasman, head of economic research at JPMorgan.

"By encouraging disinflation, strong productivity and labour supply gains might allow for job growth and low inflation to coexist," he added. "This, in turn, would open the path for early Fed easing." Futures markets swung to imply a 90% chance the Fed was done hiking, and an 86% chance the first policy easing would come as soon as June.

Markets also imply around an 80% probability the European Central Bank will be cutting rates by April, while the Bank of England is seen easing in August. Central bankers have their own chance to weigh in on this dovish outlook with at least nine Fed members speaking this week, including Chair Jerome Powell. Also on the docket are speakers from the BoE and ECB.

An odd man out is Australia's central bank, which is considered likely to resume hiking rates at a policy meeting on Tuesday as inflation stays stubbornly high. The Bank of Japan is also on the road to tightening, albeit at a glacial pace. The head of the central bank on Monday said they were closer to achieving their inflation target, but it was still not enough to end ultra-loose policy.

Elsewhere, hopes for lower borrowing costs helped MSCI's broadest index of Asia-Pacific shares outside Japan gain 1.7%, having already rallied 2.8% last week and away from one-year lows. Japan's Nikkei rose another 2.5%, after jumping 3.1% last week, while South Korea climbed 3.9% as authorities re-imposed a ban on short-selling to mid-2024.

Chinese blue chips gained 0.8%, ahead of data on trade and inflation due later this week. S&P 500 futures and Nasdaq futures were both flat. EUROSTOXX 50 futures were also little moved, while FTSE futures inched up 0.1%.

BOND RELIEF

Two-year Treasury yields paused at 4.86%, after falling 17 basis points last week. Yields on 10-year notes stood at 4.587%, some way from October's painful peak of 5.021%.

"Our view remains that rate cuts from the Fed, ECB and BoE will come a little sooner than is priced by markets and, in the initial phases, is likely to be bolder in terms of size," wrote analysts at NatWest Markets in a note. "We look for the Fed Funds rate to fall to 3-3.25%, the ECB depo rate to 3% and BoE Bank Rate to 4.25% by end-2024."

The retreat in Treasury yields pulled the rug out from under the dollar, which was pinned at 105.080 having slid 1.3% last week to the lowest since late September. The euro was firm at $1.0728, having surged 1% on Friday to its highest in two months. The dollar even lost ground to the ailing yen to stand at 149.52 and some way from its recent top of 151.74.

The drop in the dollar and yields helped underpin gold at $1,991, within striking distance of the recent five-month peak of $2,009. Oil prices edged higher, after shedding 6% last week, drawing support from confirmation Saudi Arabia and Russia would continue their additional voluntary oil output cuts.

In the Middle East, Israel on Sunday rejected growing calls for a ceasefire in Gaza, with military specialists saying that forces are set to intensify their operations against Palestinian Islamist group Hamas. Brent added 43 cents to $85.32 a barrel, while U.S. crude climbed 54 cents to $81.05 per barrel.