Markets extend rally as US inflation data fans rate pause hopes

Asian investors pushed equities even higher Wednesday after data showed US inflation fell further last month, ramping up expectations the Federal Reserve will finally pause its interest rate hike campaign.

Speculation that China will unveil a batch of measures to support the world's number two economy was also providing cheer to traders, with focus on Beijing's own monetary policy decision later in the week.

The sharp drop in the consumer price index was slightly more than forecast and followed a string of recent readings that suggested 15 months of central bank tightening were beginning to kick in.

It also comes after a mixed jobs report earlier this month that showed the labour market remained resilient but gave the Fed room to skip a hike in June.

The 4.0 percent CPI reading marks the lowest since March 2021, though it is still double the Fed's target.

Traders are now pricing the chances of a rate hike on Wednesday at about 10 percent, with analysts saying bank boss Jerome Powell will try to drive home that the pause would not signal the end of tightening.

"Decelerating inflation... coupled with full employment may suggest to some that the US is on a path to a soft landing of its economy and avoiding the recession that so many have been concerned about is looming for over a year now," said Stephen Innes at SPI Asset Management.

"We expect the Fed will pause its rate hiking cycle at this week's meeting to give more time to gauge lagged policy effects and to assess how restrictive March's regional banks turmoil has been on lending markets.

"So, let the July debate begin."

Lindsey Piegza, of Stifel Nicolaus & Co, said the Fed was now bound to stand pat, warning it "opened the door for a pause and to not walk through that door now would cause unnecessary concern. But they are going to have to communicate their work is not done".

Wall Street welcomed Tuesday's reading, with the S&P 500 clocking up a fourth straight gain and putting it within touch of the 4,400 point mark it has not hit since April 2021.

And Asia followed suit, with Hong Kong, Tokyo, Shanghai, Sydney, Singapore and Taipei all on the rise, though Seoul and Wellington struggled.

The dollar held losses suffered Tuesday in reaction to the data.

Investors are also keeping an eye on developments in Beijing as reports swirl that authorities are preparing a raft of measures to kickstart the struggling economy, including help for the property sector.

A surprise central bank decision Tuesday to cut a short-term lending rate fanned talk of a similar move for the medium-term rate later in the week.

Analysts said officials could also lower the amount of cash lenders must keep in reserve, in order to push more cash into financial markets.

Crude prices dipped slightly a day after rallying more than three percent in reaction to the prospect of a US rate pause and reports of Chinese stimulus.

OANDA's Edward Moya said the China rate cut "sent a message to traders that the world's second largest economy is finally going to get significant stimulus that should help with their struggling post-Covid recovery".

"In addition to China's stimulus, energy traders are anticipating the impact from the Saudi oil price cuts to tighten the market quickly next month."

Tokyo - Nikkei 225: UP 0.9 percent at 33,307.43 (break)

Hong Kong - Hang Seng Index: UP 0.6 percent at 19,638.37

Shanghai - Composite: UP 0.4 percent at 3,245.36

Euro/dollar: DOWN at $1.0794 from $1.0796 on Tuesday

Pound/dollar: UP at $1.2615 from $1.2612

Dollar/yen: DOWN at 140.07 yen from 140.17 yen

Euro/pound: DOWN at 85.56 percent from 85.58 pence

West Texas Intermediate: DOWN 0.3 percent at $69.21 per barrel

Brent North Sea crude: DOWN 0.2 percent at $74.14 per barrel

New York - Dow: UP 0.4 percent at 34,212.12 (close)

London - FTSE 100: UP 0.3 percent at 7,594.78 (close)