Asian shares subdued as jobs data raises odds of Fed rate hike

By Ankur Banerjee

SINGAPORE (Reuters) – Asian shares inched higher, while the dollar started the week on the front foot after the U.S. jobs data underscored a tight labour market, firming up expectations that the Federal Reserve will again raise interest rates at its meeting next month.

MSCI‘s broadest index of Asia-Pacific shares outside Japan was 0.14% higher, while Japan’s Nikkei gained 0.5%. Australian, Hong Kong and European markets are closed for Easter. E-mini futures for the S&P 500 were flat.

China shares eased on Monday, with the bluechip CSI300 Index 0.2% lower, while the Shanghai Composite Index down nearly 0.3%.

Labor Department data on Friday showed that nonfarm payrolls increased by 236,000 jobs last month, just shy of the 239,000 expected by economists in a Reuters poll.

The closely watched report also showed that annual wage gains slowed but remained too high to be consistent with the U.S. central banks 2% inflation target.

The labour market is still too tight for the Fed to lower inflation to its 2% target without further interest rate hikes, said Mansoor Mohi-uddin, chief economist at the Bank of Singapore.

“Investors are anticipating last months U.S. bank failures will force the Fed to cut rates but officials warn sticky inflation will make the Fed unlikely to ease policy this year.”

Markets are now pricing in 66% chance of the Fed raising interest rates by 25 basis points in its May 2-3 meeting, according to CME FedWatch tool.

Investor focus will now turn to the inflation report due on Wednesday that will shape the path the Fed will take in its battle against prices. Minutes of the central banks last meeting in March are also scheduled to be released on Wednesday.

With recession worries mounting, investors are betting the tumult in the banking system sparked by the sudden collapse of Silicon Valley Bank in March will tighten credit conditions. Traders have increasingly become convinced that the Fed will cut rates in the second half to ward off an economic downturn.

But some analysts see a disconnect between the Feds likely path and markets expectations.

“Not only should high inflation and a still-strong labour market keep cuts unlikely,” according to Citi strategists. “But we see persistently too-strong inflation as leading to further hikes.” Citi expects three further 25 basis point rate hikes.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 13 basis points at 3.951%, while the yield on 10-year Treasury notes rose 8.8 basis points to 3.378%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -57.7 basis points.

In the currency market, the dollar index, which measures the U.S. currency against six major peers, rose 0.118% to 102.14.

The euro was up 0.05% to $1.0902, while sterling was last trading at $1.2416, up 0.02% on the day.

The yen weakened 0.32% versus the greenback at 132.55 per dollar as Japans new central bank governor Kazuo Ueda takes over from Haruhiko Kuroda. Ueda, whose term began on Sunday, will hold his inaugural news conference at 1015 GMT on Monday.

Spot gold dropped 0.5% to $1,998.53 an ounce, while U.S. gold futures fell 0.27% to $2,006.50 an ounce.[GOL/]

U.S. crude rose 0.09% to $80.77 per barrel and Brent was at $85.18, up 0.07% on the day. [O/R]

(Reporting by Ankur Banerjee; Editing by Shri Navaratnam)