Asia stocks hesitant, dollar firms as US payrolls dent Fed rate cut wagers

Asian stock market: Asian shares started the week on a subdued note on Monday, while the dollar firmed as investors weighed when the US Federal Reserve will start cutting rates in the wake of yet another blowout jobs report.

Oil prices fell nearly 2 per cent as Middle East tensions eased after Israel withdrew more soldiers from southern Gaza, while gold prices slumped 1 per cent after scaling record high on Friday as US Treasury yields remain elevated.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was 0.26 per cent higher, while Tokyo's Nikkei (.N225) rose 1 per cent. China mainland stocks reopened after extended holidays from Thursday, with the blue-chip gauge (.CSI300) 0.5 per cent lower. Hong Kong's Hang Seng Index (.HSI) rose 0.33 per cent.

Wall Street's main indexes closed higher on Friday after data showed US job growth blew past expectations in March and wages increased at a steady clip, suggesting the economy ended the first quarter on solid ground.

"Resilient economic data are a double-edged sword for markets," said ANZ strategists in a note. "On the positive side, resilient growth indicates an economy far from recession, but it could also mean the Fed will keep rates higher for longer."

Markets are now pricing in 49.1 per cent chance of an interest rate cut from the Fed in June, the CME FedWatch tool showed, with July shaping up to be the new starting point for the eagerly awaited easing cycle.

Investors are also pricing in 62 basis points of cuts this year, less than the 75 basis points the Fed has projected. Investor focus this week will be squarely on the US consumer price index (CPI) report, which is expected to show core inflation slowing to 3.7 per cent in March from 3.8 per cent the prior month.

The expected slip in core inflation is unlikely to bring back a possible June cut after last week’s solid data dented that chance, according to Kit Juckes, FX strategist at Societe Generale.

"Market expectations are drifting in favour of a cut in July rather than June and it’s easy to see why." The changing expectations on the outlook for US rates have lifted Treasury yields, with the two-year Treasury yield, which typically moves in step with interest rate expectations, up 4.2 basis points at 4.774 per cent, the highest in nearly four months.

The yield on 10-year Treasury notes was up 4.4 basis points to 4.422 per cent. The elevated yields boosted the dollar, with the euro down 0.06 per cent to $1.0829, while sterling was last trading at $1.2622, down 0.11 per cent on the day. The Japanese yen weakened 0.12 per cent to 151.78 per dollar as traders remain on alert for possible intervention by Japanese authorities.

Nicholas Chia, Asia macro strategist at Standard Chartered, said the yen will be vulnerable to a materially strong US CPI report, with "intervention speak likely to be back on the agenda." The dollar index , which measures the US currency against six rivals, was at 104.35.

The European Central Bank is due to meet later this week and is widely expected to keep rates steady. Investors see almost no chance of a cut on April 11 but have fully priced in a move for June, followed by another two or three steps later this year.

In commodities, spot gold dropped 0.5 per cent to $2,317.09 an ounce, having breached record peak last week. US crude fell 2.32 per cent to $84.89 per barrel and Brent was at $88.89, down 2.5 per cent on the day.

Israel and Hamas sent teams to Egypt for fresh talks on a potential ceasefire ahead of the Eid holidays, easing tensions in the Middle East that drove up oil prices by more than 4 per cent last week on concerns of supply disruption.