Asian stocks subdued on yen caution, U.S. inflation in focus

Scott Murdoch resonance

SYDNEY (Reuters) - Asian stocks were subdued as investors watched closely to see what interventions Japan might take to stem the yen's decline and waited for U.S. inflation data later on Wednesday to provide clues about future interest rate moves.

The Morgan Stanley Capital International (MSCI) broadest index of Asia-Pacific equities outside of Japan rose 0.2% after U.S. stocks ended the month on a modestly higher note. The index is up 0.2% so far this month.

The benchmark 10-year Treasury yield was 4.3636%, compared to Tuesday's U.S. close of 4.366%. The two-year Treasury yield touched 4.7426%, compared to the U.S. close of 4.747%.

Australian stocks are up 0.3% and Japan's Nikkei is down 0.41%. The Nikkei is on track for another test of 40,000, which will be helped by a decline in the yen.

However, further weakness in the yen could prompt intervention, especially if the yen-dollar exchange rate breaks above 152.

"Market participants will be on high alert for possible foreign exchange intervention by the Japanese Ministry of Finance (MoF) today," said CBA economists. They added that a strong U.S. inflation report would prompt a rebound in the dollar against the yen, which could lead the Japanese government to start buying yen.

In Asian trading, the dollar fell 0.01% against the yen to 151.76. The currency is getting closer to its high of 151.97 on March 27 this year.

Hong Kong's Hang Seng Index edged up 0.7%, while China's blue-chip CSI 300 index was flat.

Europe's single currency was flat at $1.0856, up 0.64% in a month, as the U.S. dollar index, which tracks the greenback against a basket of currencies of other major trading partners, fell to 104.1.

Investors will be watching U.S. consumer price data due out on Wednesday for the next step in interest rate action. The data is expected to show aggregate gross inflation rising to 3.41 TP3T, up from 3.21 TP3T in February.

"Markets are looking at these data to answer the question of whether inflation is sticky, or whether deflation is progressing in line with the Fed's expectations," said an ANZ economist.

"We believe that the data will suggest that inflationary pressures are slowly abating".

Financial markets are now considering the prospect of a U.S. interest rate cut as early as June, with inflation data key to the central bank's next move.

"The Fed funds futures market currently sees the likelihood of a June rate cut at about 60%. If core CPI strengthens to 0.3% or above in the last month, this could further reduce the likelihood of a June rate cut, pressuring US yields and the dollar sharply higher," CBA economists said in a report. The CBA economists said in a report.

"But if the core CPI falls below 0.3% in the month, the market may price in only a small uptick in a June rate cut, and the dollar may weaken slightly."

In the U.S., the Dow Jones closed down 0.02%, the S&P 500 rose 0.1% and the NASDAQ Resonance Composite rose 0.3%.

U.S. crude oil rose slightly to $85.31 per barrel. Brent crude was flat at $89.42 per barrel.

Gold was slightly higher. Spot gold is trading at $2,352.93 per ounce. [GOL/] (Edited by Jacqueline Wong)

(Editor: Jacqueline Wong)