6th June 2023 – (Tokyo) On Tuesday, Asian stock markets edged lower after economic data revealed that the US services sector unexpectedly softened in May. This reinforced expectations that the Federal Reserve may refrain from an interest rate hike when it meets next week. MSCI‘s broadest index of Asia-Pacific shares outside Japan fell by 0.1% to 514.37. Meanwhile, Tokyo’s Nikkei eased 0.22%, and Australia’s S&P/ASX 200 index lost 0.73% ahead of the Reserve Bank of Australia‘s (RBA) policy decision later in the day. China shares also declined by 0.15%, while Hong Kong’s Hang Seng Index was 0.07% lower.
According to data released overnight, the US services sector barely grew in May as new orders slowed. This pushed a measure of prices paid by businesses for inputs to a three-year low, which could aid the Federal Reserve’s fight against inflation. The services industry accounts for more than two-thirds of the U.S. economy.
“The index sends another signal that demand is cooling and that the cumulative tightening is working through the economy, giving room to the Fed to pause in June to assess conditions further,” said Saxo Markets strategists in a note to clients.
A string of economic data, along with last week’s dovish rhetoric from Fed officials, has emboldened bets of the Fed refraining from an interest rate hike at its June 13-14 meeting. Data on Friday showed U.S. nonfarm payrolls rose by 339,000 jobs in May. However, the surge in the unemployment rate to a seven-month high of 3.7% suggested an easing in labor market conditions. Markets are now pricing in a 77% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool.
“The tactical risk for equity investors in the very near term is that the Fed indeed skips a meeting and raises rates in July and not June,” said Gary Dugan, CIO of Dalma Capital. “The vibrancy of growth, the debt ceiling as an issue out of the way now, and a slow-moving Fed might just trigger a further rally in equities.”
In oil markets, prices eased, giving up most of the gains from the previous session after the world’s top exporter, Saudi Arabia, said that it would further cut output. U.S. crude fell by 0.25% to $71.97 per barrel, and Brent was at $76.55, down 0.21% on the day. Saxo strategists said recession concerns, firmer signs of Fed rate cuts, or China stimulus measures may be needed to turn sentiment on the energy markets. “Still, risks of a tighter market in the second half remain with OPEC focused on ensuring market stability.”
In the currency market, the dollar index, which measures the greenback against six major peers, eased 0.01%. The yen weakened 0.04% to 139.62 per dollar, while Sterling was last fetching $1.2436, off 0.01% on the day. The Australian dollar eased by 0.02% to $0.661 as traders wait for the policy decision from the country’s central bank.
“We expect the RBA to leave the cash rate on hold,” analysts at Commonwealth Bank of Australia said in a note. However, the decision to raise the minimum wage by 5.75% from 1st July increases the risk the RBA hikes the cash rate by 25 basis points, the CBA analysts wrote.
In cryptocurrencies, Bitcoin was last at $25,657.98, having slid over 5% overnight after the US securities regulator sued crypto exchange Binance, in another blow to the industry.