Asian Stocks Lower As Rumors of Inflation Float

Asian equities fell on Wednesday ahead of a key US inflation report, which will likely influence when the Federal Reserve will end its aggressive rate hikes, with markets betting on at least one more at next month's policy meeting.

In choppy trading, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.17 percent, snapping a three-day winning streak.

The gloomy mood appeared set to persist in Europe, with futures indicating a broadly lower open. The Eurostoxx 50 futures were down 0.16 percent, while the German DAX futures were up 0.01 percent and the FTSE futures were down 0.07 percent.

Following Friday's jobs report, which showed a resilient labour market in the United States, investors are now focused on the March inflation report, which is due later in the day.

According to a Reuters poll of economists, the consumer price index is expected to show core inflation rose 0.4% month on month and 5.6% year on year in March.

"The focus will shift from the decline in headline inflation to underlying inflation pressures and how sticky they may be, which could impact how long the Fed needs to leave interest rates at higher levels," said Shane Oliver, head of investment strategy at AMP Capital in Sydney.

The risk to markets, according to Oliver, is that the narrative shifts from inflation to the risk of recession, and markets aren't particularly concerned about it right now because it has been talked about for so long and hasn't happened yet.

According to the CME FedWatch tool, markets are now pricing in a 66% chance of the Fed raising interest rates by 25 basis points in May and then pausing for subsequent meetings.

Philadelphia Federal Reserve Bank President Patrick Harker said on Tuesday that the US central bank may soon be done raising interest rates, but he reiterated the bank's desire to return inflation to its 2% target.

The Federal Reserve raised interest rates by a quarter percentage point last month, bringing them to a range of 4.75 percent to 5.00 percent.

"I'm in the camp that gets up above 5 and then sits for a while," Harker said.

The minutes of the Fed's March meeting will be released later in the day, and investors will scrutinise them for clues on the central bank's monetary path as well as the impact of the banking sector's stress.

As it lowered its global growth forecasts for 2023, the International Monetary Fund warned on Tuesday that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year.

The turmoil in the banking sector caused by the failures of Silicon Bank and Signature Bank raised some expectations that the Fed would need to cut interest rates to alleviate some of the market stress, but a sticky inflationary environment is unlikely to give the Fed much leeway.

The OPEC+ group's cut in oil production announced last week fanned fears of inflation resuming, and for investors to truly relax their concerns about inflation, there must be a clear drop in service prices, according to Saxo Markets strategists.

"We don't believe we've arrived yet." With oil prices rising again and the labour market only gradually cooling, the risk of core inflation remaining elevated for longer remains," they write.

China shares were mixed, with the Shanghai Composite Index rising 0.4% and the Hang Seng Index falling 1.2% as investors weighed rising geopolitical tensions.

China said on Wednesday that Taiwanese President Tsai Ing-wen was pushing the country into "stormy waters," following military drills in response to Tsai's recent meeting with US House Speaker Kevin McCarthy in California.

Tsai stated that Taiwan's overseas trip, which included a meeting with McCarthy in the United States as well as stops in Guatemala and Belize, demonstrated Taiwan's resolve to defend freedom and democracy.

In other Asian markets, Japan's Nikkei rose 0.6%, while Australia's S&P/ASX 200 index rose 0.4%.

The dollar index, which compares the US currency to six rivals, fell 0.049 percent in the currency market. The euro was up 0.12% at $1.0923, while the pound was last trading at $1.2435, up 0.9% on the day.

The yen dropped 0.9% to 133.80 per dollar. According to the IMF, the Bank of Japan could help prevent future policy changes by allowing more flexibility in its bond yield curve control.

US crude rose 0.6% to $81.58 per barrel, while Brent was at $85.65, up 0.05% on the day.

Spot gold rose 0.8% to $2,018.25 per ounce. Gold futures in the United States rose 0.55 percent to $2,015.90 per ounce.