Asian shares higher as dollar retreats, risk events abound

By Stella Qiu

SYDNEY (Reuters) - Asian shares tracked Wall Street higher amid hopes that China's economy would pick up pace as COVID-19 curbs ease, although caution ahead of a week full of risk events, including the Federal Reserve's policy meeting, could cap sentiment.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9% in early trade, edging closer to a three-month high hit earlier in the week. For the week, it was also set to rise 0.9%.

Japan's Nikkei surged 1.1%.

Hong Kong's Hang Seng index advanced 1.2%, with mainland developers up a whopping 4%. Chinese blue chips, however, saw more subdued gains.

China's Premier Li Keqiang, in comments carried by state media, said on Thursday China's shift in COVID policy would allow the country's economy to pick up pace, a day after a top-level party meeting pledged to focus on stabilising growth while optimising the pandemic measures.

Apart from China optimism, investors are focused on U.S. producer price inflation figures later in the day for more signs about the health of the U.S. economy, after data overnight showed some loosening in the labour market, with weekly jobless claims rising moderately.

U.S. stocks snapped their recent losing streak to rebound. The Dow Jones Industrial Average rose 0.55%, the S&P 500 gained 0.75%, and the Nasdaq Composite added 1.13%.

U.S. monthly consumer inflation data is also due next week, with economists forecasting inflation likely slowed slightly to 8.0% in November from a year earlier, compared with 8.2% in October.

Futures have priced in a near-certain possibility that the Fed will slow down its rate hike to 50 basis points next week, but the target U.S. federal funds rate would have to peak around 4.9% by next May.

"This slowing is not a signal that the central bank's job is nearly done...the slower pace of hikes starts a new phase of the Fed's tightening cycle," said Brian Martin, head of G3 economics at ANZ. "With inflation proving sticky and the labour market still buoyant, the risks to our 5.00% terminal view are to the topside."

Analysts at Barclays (LON:BARC) expect the key objective for the Fed at this meeting would be to execute a transition to slower hikes without easing broader financial conditions.

"With data on activity suggesting that the Fed's hikes, to date, have had limited traction on activity, we think the FOMC will accompany the move with hawkish dots to reiterate that the hiking cycle has a ways to go."

The Fed, the European Central Bank and the Bank of England are all set to announce interest rate decisions next week as policymakers continue to tap the brakes on economic growth through firmer rates to thwart stubbornly high inflation.

The U.S. dollar slid 0.2% against a basket of major currencies on Friday, on top of a drop of 0.4% overnight. The safe-haven greenback was set to finish the week flat.

Treasury yields rose overnight and remained largely steady, after falling to the lowest in three years earlier in the week on expectations of slower growth or that a recession will curb the rise in rates.

The yield on benchmark 10-year Treasury notes held at 3.4819%, compared with its U.S. close of 3.493%. The two-year yield touched 4.3139%, up slightly from its U.S. close of 4.312%.

The yield curve remains the most inverted since the early 1980s at around -83bps, pointing towards a U.S. recession in the near future.

In the oil market, prices rose after tumbling the day before amid fears a slowdown in the global economy would lead to reduced demand.

U.S. West Texas Intermediate (WTI) crude futures surged 0.9% to $72.11 per barrel, while Brent crude settled at $76.15 a barrel, 1% higher.

Gold was slightly lower. Spot gold traded at $1,788.99 per ounce.