Asia stocks rally on renewed global rate cut optimism

By Ankur Banerjee

SINGAPORE (Reuters) - Asian stocks rose on Friday, on course for a third week of gains, while the dollar was steady as fresh signs of an easing U.S. labour market stoked optimism around interest rate cuts this year ahead of next week's crucial inflation data.

Sterling was steady at $1.2515, having touched a more than two-week low of $1.2446 on Thursday after Bank of England (BoE) paved the way for the start of rate cuts as soon as next month.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.66% and was on course for a nearly 1% gain for the week, its third straight week of gains. Japan's Nikkei was 0.37% higher.

China stocks were lower, with blue-chip shares down 0.28% as geopolitical concerns weighed on sentiment following a trade restriction list issued by the Biden administration and potential new China tariff.

Hong Kong's Hang Seng Index though rose 2%, having touched an eight-month high in early trading.

The risk-on mood is set to continue in Europe, with Eurostoxx 50 futures up 0.14%, German DAX futures 0.19% higher and FTSE futures up 0.45%.

Data on Thursday showed U.S. initial claims for state unemployment benefits increased more than expected by 22,000 to a seasonally adjusted 231,000 for the week ended May 4, the Labor Department said.

The figures follow last week's report showing U.S. job growth slowed more than expected in April and the increase in annual wages fell below 4.0% for the first time in nearly three years.

"After a period of remarkable strength and resilience, signs are growing that the U.S. labour market may be starting to soften," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

Markets will be closely watching April U.S. producer price index and the consumer price index out next week for signs that inflation has resumed its downward trend towards the Fed's 2% target rate.

Hotter-than-expected inflation reports last month knocked back any lingering expectations of interest rate cuts in the near term, with markets now fully pricing in a rate cut only in November though there remains a chance of a cut in September.

In contrast, markets now imply a 50-50 chance of a BoE cut in June and are almost fully priced for August. They also imply an 88% chance the European Central Bank will ease in June.

BOE Governor Andrew Bailey said there could be more reductions than investors expect, the latest sign of the growing divergence between Europe and U.S. rate outlook.

Traders currently anticipate 47 basis points of cuts this year from the Fed. In comparison, traders are pricing in 58 bps of easing from the BoE this year, while anticipating 72 bps of cuts from the ECB.

The shifting expectations around U.S. rates have kept the dollar adrift, with the euro holding to most of its 0.3% overnight gains. It last fetched $1.0774.

The single currency was on track for its fourth straight week of gains on the dollar.

The dollar index, which measures the U.S. currency versus six peers, inched higher to 105.30.

The yen remains in the spotlight after last week's suspected rounds of interventions from Japanese authorities totalling nearly $60 billion aimed at pulling the yen off its 34-year lows of 106.245 per dollar touched on April 29.

On Friday, the yen was last at 155.71 per dollar, with Japan's Finance Minister Shunichi Suzuki repeating Tokyo's recent warnings that it was ready to take action against disorderly currency moves.

Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, said the Ministry of Finance wants to avoid spikes in volatility which could negatively impact domestic financial markets.

"So like we suspect a few days ago, they will intervene if intraday moves become too large. But I don't think they'll push against a steady depreciation, like we've seen since."

In commodities, oil prices were on the rise, with U.S. crude up 0.68% to $79.80 per barrel and Brent at $84.38, up 0.6% on the day. [O/R]

Spot gold added 0.3% to $2,353.95 an ounce. [GOL/]

(Reporting by Ankur Banerjee; Editing by Shri Navaratnam and Himani Sarkar)