Asian stocks edged higher on Tuesday, while the dollar remained steady as investors awaited a crucial U.S. inflation report that could shape the Federal Reserve’s monetary policy decisions. The report is expected to offer insights into the timing of potential interest rate cuts amidst concerns about inflationary pressures and geopolitical tensions.
Bitcoin, the popular digital asset, continued its strong performance, surpassing $50,000 for the first time in over two years. The milestone was attributed to increased inflows into exchange-traded funds backed by Bitcoin.
In early trading, MSCI’s broadest index of Asia-Pacific shares outside Japan rose by 0.15%, although it remained down by 3% year-to-date. Japan’s Nikkei index surged by 1.7% to reach a fresh 34-year high, driven by a weakening yen approaching the closely-watched 150 per dollar level.
However, financial markets in China remained closed for the Lunar New Year holiday and are set to resume trading on February 19, while Hong Kong markets will reopen on February 14. Consequently, trading in Asia remained subdued, with investors taking cues from Wall Street.
On Monday, the Nasdaq briefly surpassed its record closing high from November 2021 before slipping in the afternoon session. The S&P 500 closed lower but remained above the 5,000-point level it crossed on Friday.
Investor focus this week centers on key reports on January’s U.S. Consumer Price Index (CPI) and Producer Price Index, scheduled for release later in the week. Recent data indicating strength in the labor market has led to a reassessment of expectations for interest rate cuts by the Federal Reserve.
Market sentiment suggests diminished expectations for a rate cut in March, with traders now pricing in a 13% chance compared to 77% a month earlier. Economists polled by Reuters anticipate a rise of 2.9% in CPI on a year-on-year basis, down from 3.4% in the previous month.
However, there is a risk of an upside surprise in the inflation report, which could lead to higher yields and strengthen the dollar further, according to analysts. Traders are currently pricing in 111 basis points of cuts this year, compared to the 75 bps projected by the Fed.
In commodity markets, U.S. crude prices rose marginally to $76.94 per barrel, while Brent crude held steady at $81.99 per barrel. The outcome of the inflation report is expected to provide further direction to global financial markets, particularly regarding the outlook for monetary policy in the United States.