Asian shares rise on US inflation relief

SYDNEY: Asian shares rose on Monday after a soft reading on US inflation restored some hope of further policy easing next year, while there was relief that Washington had avoided a government shutdown.

After the flurry of recent central bank decisions, this week has been pretty quiet with only minutes of some of those meetings. There are no Federal Reserve speeches and US data is of secondary importance.

Themes were otherwise largely the same, with the dollar supported by a relatively strong economy and higher bond yields, which in turn weighed on commodities and gold.

It’s also a headache for emerging market countries, which have had to intervene to prevent their currencies from falling too far and stem domestic inflation.

For now, the afterglow of the US inflation report was enough to lift MSCI’s broadest index of Asia-Pacific shares outside Japan by 0.3%.

Japan’s Nikkei rose 0.7% and South Korea’s rose 0.9%.

S&P 500 futures added 0.3%, while Nasdaq futures gained 0.4%. The S&P 500 fell about 2% last week and the Nasdaq 1.8%, though the latter is still up 30% for the year.

Analysts at BofA noted that the S&P 500 rose 23% for the year, but the gain was only 8% if the 12 largest companies were excluded. They warned that such extreme concentration is a vulnerability going into 2025.

Wall Street rallied on Friday after a key gauge of core US inflation printed lower than expected at 0.11%, providing a partial antidote to the Fed’s hawkishness earlier in the week.

Fed funds futures rallied to show a 53% chance of a rate cut in March and a 62% chance for May, though they only have two quarter-point easings priced at 3.75-4.0% for 2025. A few months ago, the market was hoping that the rate would come down to around 3.0%.

The prospect of fewer cuts combined with expectations of more debt-funding government spending to pressure bond markets, with the 10-year yield rising nearly 42 basis points in just two weeks for the biggest such increase since April 2022.

“The recent strengthening in core inflation has interacted with the growing threat of tariffs and immigration restrictions to temper the Fed’s inflation optimism,” JPMorgan economist Michael Ferroli noted.

“Given our inflation and unemployment rate forecasts, we continue to look for a 75bp cut next year with a hold in January followed by a quarterly tad.”

In currency markets, the dollar index 107.970 <-USD> is near a two-year high, having climbed 1.9% for the month so far. The euro looked vulnerable at $1.0432 after retesting support around $1.0331/43 last week.

The dollar was firm at 156.44, up 4.5% so far in December, but faces further risks of Japanese intervention if it challenges the 160.00 barrier.

A stronger dollar combined with higher bond yields to weigh on gold, which settled at $2,624 an ounce after falling 1% last week.

A higher dollar is also weighing on oil, already hampered by worries about Chinese demand following disappointing retail sales figures last week.

Brent was up 4 cents at $73.00 a barrel, while US crude was up 12 cents at $69.58 a barrel.