Asia Shares Climb on US Inflation Relief

SYDNEY (Reuters) - Asian shares experienced a significant rally on Monday, driven by a favorable report on U.S. inflation that has rekindled optimism for potential policy easing in the coming year. Additionally, investors welcomed the news that the U.S. government successfully avoided a shutdown.

This week is expected to be quieter in terms of central bank activities, with only minutes from several recent meetings set to be released. Notably, there will be no speeches from the Federal Reserve, and economic data from the U.S. will hold less importance during this period.

Overall market trends remained consistent, with the U.S. dollar supported by a reasonably strong economic outlook and rising bond yields. This development puts pressure on commodities and gold, making things challenging for emerging market economies, which are now compelled to intervene in their currency rates to prevent further declines and rising domestic inflation.

For now, the positive impact of the U.S. inflation report saw MSCI's broadest index for Asia-Pacific shares outside Japan rise by 0.3%. Japan's Nikkei gained 1.2%, and the auto sector surged by 1.3% owing to emerging news about a possible merger between Nissan and Honda. Meanwhile, South Korean shares climbed 1.3%, and Taiwan's market jumped 2.6%. In China, blue-chip shares rose by 0.7%, despite the central bank's attempts to halt the decline in 10-year bond yields, which recently hit a record low of 1.665%.

In European markets, EUROSTOXX 50 futures went down by 0.2%, while other indices remained relatively unchanged. Futures for the S&P 500 increased by 0.4%, and Nasdaq futures improved by 0.6%. However, both the S&P 500 and Nasdaq had experienced losses of nearly 2% and 1.8%, respectively, in the previous week, although the Nasdaq is still showing a remarkable gain of 30% year-to-date.

Analysts from Bank of America highlighted that while the S&P 500 was up 23% for the year, excluding the 12 largest companies shrinks the gain to just 8%, indicating a potential risk as this heavy concentration could be a vulnerability looking ahead to 2025.

Wall Street closed on a positive note last Friday after a key measure of core U.S. inflation registered at a lower-than-expected 0.11%, providing some relief from the Fed's previously hawkish stance.

The market is now projecting a 53% chance of a rate cut in March and a 62% chance in May, although only two quarter-point reductions to 3.75-4.0% are estimated for the entirety of 2025. This is a significant shift from earlier expectations that rates might bottom out around 3.0%.

These expectations of fewer rate cuts coincided with rising assumptions about increased government spending funded by debt, which has put extra pressure on the bond market. In just two weeks, 10-year yields spiked by nearly 42 basis points, marking the largest increase since April 2022.

"The recent increase in core inflation, coupled with the looming threats of tariffs and immigration policies, has moderated the Fed's inflation optimism," stated JPMorgan economist Michael Feroli. "Considering our projections for inflation and unemployment, we forecast a total of 75 basis points in cuts next year, with no changes in January and subsequent cuts occurring quarterly after that."

In currency trading, the dollar remains near two-year highs at 107.720, reflecting a 1.9% increase for the month. The euro appears weak at $1.0441, having tested support levels again around $1.0331/43 last week. The yen stood at 156.55 after climbing 4.5% this December, posing a threat of intervention by the Japanese government if it attempts to breach the 160.00 mark.

The combination of a strong dollar and rising bond yields weighed on gold prices, which are now at $2,625 per ounce after a 1% drop last week. Similarly, oil prices also advanced along with other risk assets, though concerns regarding slow demand from China after disappointing retail sales data have tempered enthusiasm. Oil climbed 36 cents to $73.29 per barrel, while another oil type rose by 40 cents to $69.86 per barrel.

Asia, Shares, Inflation