Stocks in Japan outperformed their Asian counterparts on Thursday, after further evidence of a slowing U.S. labor market boosted the likelihood of the Federal Reserve cutting interest rates next week.
The Topix and Nikkei 225 indices each rose by about 1.5%, compared to a 0.3% rise in the broader MSCI index of Asian stocks.
South Korean and Taiwanese stock markets declined after two days of gains. US stock futures were steady in Asian trading after the S&P 500 rose 0.3% overnight, while Bitcoin remained near $94,000 after a two-day rally.
Data released on Wednesday showed that U.S. companies cut jobs in November at the fastest pace since early 2023, reinforcing concerns about a more pronounced weakness in the labor market. Swap rates also pointed to rising expectations of an interest rate cut in December, with traders pricing in a 25-basis-point reduction with over 90% of the market.
Frederic Neumann, chief Asia economist at HSBC Holdings, said: Unlike many Asian markets, Japan is more sensitive to developments related to expectations of a US interest rate cut, partly because the Fed may set the pace for the Bank of Japan via the exchange rate channel.
He added that increased confidence in a US interest rate cut, by easing pressure on the yen, could give the Bank of Japan more room to maintain an accommodative policy for a longer period.
Japanese bond yields rise as 30-year bond auction awaited
Japanese bond yields rose sharply as bets intensified on an interest rate hike at the Bank of Japan's anticipated decision on December 19. Investors were awaiting a 30-year bond auction later on Thursday, after a 10-year bond sale earlier in the week saw strong demand.
In Australia, yields have risen to their highest level this year amid growing expectations that the central bank may return to raising interest rates to curb inflation.
In currency markets, the dollar index remained virtually unchanged after falling 0.4% in the previous session, when U.S. Treasury yields rose along the curve, pushing two-year bond yields to around 3.48%.
The dollar's decline has increased pressure on weaker Asian currencies, such as the Indian rupee, which fell below the psychologically important level of 90 rupees to the dollar on Wednesday.
China weakens the yuan, and Asian stocks see limited gains.
Meanwhile, the People’s Bank of China set the yuan’s reference exchange rate at a much weaker level than expected, signaling its intention to limit the currency’s gains, which are approaching 7 yuan to the dollar.
Despite the limited movement in Asian stocks this week, the MSCI regional index is on track for its third consecutive session of gains. It jumped 2.7% last week, its biggest weekly increase since early October.
Homin Lee, chief macro strategist at Lombard Odier Singapore, said that relief following the US ADP jobs data for November, and growing hopes for an interest rate cut next week, are contributing to improved risk appetite in Asia-Pacific markets this morning.
Regarding Japan, he said: If the results of another auction come in quietly, the market may begin to promote the narrative of a flatter yield curve and a recovery in demand for Japanese bonds, before the Fed decides on an actual cut.
In commodities, silver dipped slightly but remained trading near its all-time high amid strengthening bets on interest rate cuts.
Gold dipped slightly. Oil held onto a modest gain as investors assessed the prospects for a ceasefire in Ukraine and the implications of tensions between the United States and Venezuela.
Following developments in trade and geopolitical tensions
Trade and geopolitical developments were also a focus for investors. U.S. Commerce Secretary Howard Lutnick said the United States expects a significant investment commitment from Taiwan during trade talks.
Separately, Nvidia CEO Jensen Huang said he was unsure whether China would accept H200 chips if the United States eased export restrictions, following his meeting Wednesday with Donald Trump.
Despite this apparent optimism, US stocks gained despite weakness in most major technology companies. Salesforce shares rose in extended trading after the company issued revenue forecasts that beat analysts' estimates.
Division over the path of interest rates
US policymakers remain divided over whether to cut interest rates for a third time in a row, as they try to balance a slowing labor market with persistently high inflation.
Data released on Wednesday showed that the U.S. services sector expanded at a slightly faster pace, while a measure of prices paid fell to its lowest level in seven months.
Ahead of the Federal Reserve's final meeting of the year, officials will receive a delayed reading of their favorite inflation gauge. The September income and spending report is due on Friday, following a delay due to the government shutdown.
The report will include the personal consumption expenditures price index and its core index, which excludes food and energy. Economists expect a third consecutive increase of 0.2% in the core index, keeping the annual reading just below 3%, indicating steady but persistent inflationary pressures.
Elias Haddad of Brown Brothers Harriman said: The data currently points to the need for a further interest rate cut. Labor demand is weak, consumer spending is showing early signs of slowing, and the upside risks to inflation are fading.
