Asian shares hesitant on China inflation data, United States bank jitters

Asian shares were on the defensive on Wednesday after China inflation data confirmed the recovery in the world's second-biggest economy is losing steam, while resurfacing concerns about U.S. bank stability also capped sentiment.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.1 per cent after a 1.2 per cent tumble a day earlier. Japan's Nikkei slipped 0.1 per cent.

The much-watched data on Wednesday showed China's consumer prices fell 0.3 per cent in July from a year ago, slightly better than expected but the first decline since February 2021. Producer prices dropped for a 10th consecutive month. The data followed disappointing trade figures a day earlier that fuelled concerns about the global economic outlook.

China's blue chips eased 0.2 per cent while Hong Kong's Hang Seng index fell 0.5 per cent.

Chinese property developers listed in Hong Kong dropped 0.5 per cent after a 4.8 per cent plunge a day earlier, as worries about the sector, a major pillar of economic growth, persisted.

"China is once again facing renewed headwinds posed by the 3D challenge of debt, demographics and deflation," said Chetan Ahya, chief Asia economist at Morgan Stanley.

"We think China is better-placed than Japan in the 1990s. It should be less challenging to prevent China from falling into a persistent debt-deflation loop."

Carol Kong, a currency strategist at CBA, said fading base effects and government policy support suggested deflation was likely to be short-lived.

Overnight, Wall Street finished lower in a broad sell-off after the downgrading of several lenders by Moody's reignited fears about the health of U.S. banks and the economy. The Dow fell 0.5 per cent, the S&P 500 lost 0.4 per cent and the Nasdaq Composite dropped 0.8 per cent.

The Italian government also shocked markets on Tuesday by setting a one-off 40 per cent tax on profits made by banks from higher interest rates, sending regional banking shares down 3.5 per cent.

It later said the new tax on banks would not amount to more than 0.1 per cent of total assets, in a move that could lead to a rebound in European banking shares on Wednesday.

Longer-term Treasury yields slipped further in Asia after solid interest for the $42 billion sale of three-year notes. 10-year yields slipped 2 basis points to 4.004 per cent, after falling 5 basis points overnight to as low as 3.9840 per cent, a one-week trough.

The rates-sensitive two-year yields eased 1 basis point, after ending the previous session largely flat.

Markets are waiting for the U.S. inflation report on Thursday, which is expected to show headline inflation picking up slightly in July to an annual 3.3 per cent pace, while the core rate is seen unchanged at 4.8 per cent.

The U.S. dollar held gains at 102.49 against a basket of currencies, having risen 0.5 per cent overnight on safe-haven demand.

The risk-sensitive Australian dollar breached a key support level overnight before bouncing back to $0.6536.

Elsewhere, oil prices were marginally lower. Brent crude futures eased 0.2 per cent at $86.02 per barrel and U.S. West Texas Intermediate crude futures also fell 0.2 per cent to $82.73.

The gold price was slightly higher at $1,927.67 per ounce.