Asian Stocks Decline as Strong US Economic Data Boosts Dollar

Asian stocks faced declines on Friday as robust economic data from the United States strengthened the dollar, heightening expectations of prolonged interest rate stability and dampening investor appetite for riskier assets.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped by 0.5%, marking a potential 1% weekly decline, snapping a four-week winning streak. Japan’s Nikkei fell by 1.45%, while China stocks remained relatively unchanged in early trading. However, China’s military conducting war games near Taiwan contributed to investor caution, keeping sentiment subdued. Hong Kong’s Hang Seng Index also registered a decline of 0.33%.

The US released positive economic indicators, including a drop in jobless claims and stronger-than-expected business activity in May, as per S&P Global’s Flash PMI survey. This data, combined with hawkish minutes from the Federal Reserve’s recent meeting, led to a revision in market expectations for interest rate cuts. Currently, markets anticipate only 35 basis points of easing in 2024, down from earlier expectations of 150 basis points at the start of the year.

Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, remarked, “This week’s data reaffirms the Fed simply does not have the capacity to provide policy accommodation.” He emphasized the necessity for labor market weaknesses to prompt easing, a scenario not evident presently.

The dollar strengthened against major peers, with the dollar index rising nearly 0.6% to 105.06, on track for its largest weekly gain since mid-April. This surge in the dollar also exerted pressure on the yen, which traded at 157.03 per dollar, hovering near a three-week low.

In Japan, core inflation slowed for a second consecutive month in April, although it remained comfortably above the Bank of Japan’s 2% target. BOJ Governor Kazuo Ueda indicated the economy was on a path of moderate recovery, suggesting potential interest rate hikes in the near future.

Meanwhile, sterling remained muted at $1.2694, with the start of election campaigns in the UK drawing attention. However, analysts believe the polls are unlikely to have a significant impact on the markets.

In commodity markets, oil prices remained steady, with Brent crude at $81.39 a barrel, while US West Texas Intermediate crude (WTI) futures stood at $76.87. Gold prices saw a modest increase, rising by 0.24% to $1,334.16 per ounce, although they were poised for a 3.3% decline for the week.