Japanese and Australian shares hit record high after soft US inflation

Japanese and Australian shares hit fresh record highs on Friday as a key US inflation reading came in as expected, a relief for investors that had looked for a June rate cut, while mixed data from China bolstered hopes for more policy support.

Europe is set to open higher, with both EUROSTOXX 50 futures up 0.5 per cent and FTSE futures gaining 0.6 per cent. US futures gained about 0.2 per cent.

The Nikkei index jumped 1.9 per cent to hit a fresh all-time high, extending a surge of 7.9 per cent the previous month when it breached levels last seen in 1989. Australia’s resources-heavy shares rose 0.6 per cent to a new record high.

MSCI’s broadest index of Asia-Pacific shares outside Japan also gained 0.2 per cent, although it was still set for a weekly loss to 0.4 per cent.

Data on Friday showed China’s factory activity contracted for a fifth straight month in February, while the expansion in the services sector picked up pace, highlighting an uneven recovery for the world’s second-largest economy.

That fed hopes of more policy support from Chinese policymakers at the annual parliament meeting next week where Beijing is set to unveil economic targets for the new year.

“Although the (activity) survey readings remain below historical averages, this is likely distorted by sentiment effects,” said analysts at Capital Economics. “We expect a modest recovery in China’s growth momentum thanks to policy support, although this rebound appears fragile and may not last once policy support is scaled back.”

China’s mainland markets were higher. The bluechips rose 0.4 per cent and Shanghai Composite index edged up 0.2%, after rebounding nearly 10 per cent last month on the back of Beijing’s efforts to stop short-selling in the market.

Hong Kong’s Hang Seng index also reversed earlier losses to be up 0.6 per cent.

Overnight on Wall Street, the S&P 500 and Nasdaq closed at record highs. The US personal consumer expenditures (PCE) price index, the Federal Reserve’s preferred gauge for inflation, rose 0.3 per cent in January from a month earlier. The core PCE price index rose 0.4 per cent, as expected.

That kept the prospects of a June interest rate cut alive. Markets still see a 76 per cent probability the Fed will start cutting interest rates in June, with a total easing of 82 basis points priced in for this year.

“The PCE data confirms the unhelpful January inflation surprise already previewed by earlier CPI and PPI numbers,” said Taylor Nugent, a senior economist at National Australia Bank.

“We don’t think the disinflation trend has been arrested, but there is some risk support from residual seasonality issues in the January increase also bleeds into February.”

Further aiding sentiment, Fed speakers overnight reiterated that policymakers will look through recent data that showed price pressures rebounded in January to focus on overall progress in inflation.

In Europe, inflation readings in Germany, France and Spain all eased, mostly in line with expectations, which should bode well for eurozone inflation data due later on Friday. That drove a fall in the euro, which was hovering at $1.0810, having eased 0.3 per cent overnight.

Asian currencies traded in a narrow range on Friday as stocks fell following data showing US inflation declined to a three-year low, maintaining expectations of a Federal Reserve rate cut in June. Regional currencies remained muted through the week.

The Philippine peso climbed 0.4 per cent on the day, but was set for a 0.2 per cent weekly fall, while the Thai baht was on track for a 0.5% gain for the week.

The Malaysian ringgit inched 0.1 per cent higher, heading for a 0.8 per cent increase for the week, its best weekly performance in two months. The currency has edged away from the 26-year low it reached last week.

The country’s finance ministry expects the ringgit to appreciate this year and has dismissed suggestions of adjusting monetary policy to prop up the currency, which has weakened by 3.2 per cent in 2024. Malaysia’s Prime Minister Anwar Ibrahim and central bank governor Abdul Rasheed Ghaffour have both said that they perceive the ringgit as undervalued and not reflective of the country’s strong fundamentals.

Second Finance Minister Amir Hamzah Azizan has said that the central bank has stepped up efforts to curb excessive movement in the ringgit’s value and encouraged firms to use the local currency for export settlements to reduce dependency on the dollar.

“We could see more relief for the ringgit by the middle of the year, but for now, I think the interest rate differential or disadvantage, could still work against the ringgit,” said Moh Siong Sim, FX strategist at Bank of Singapore.

Meanwhile, US personal consumer expenditures (PCE) price index data picked up in January in line with expectations, while annual inflation slipped to the lowest in three years, keeping the chances of a Fed rate cut by mid-year on the table.