Asian stocks wobble as traders weigh Fed rate pause option

Asian stock markets fell on Tuesday after economic statistics revealed that the United States’ services sector unexpectedly weakened, bolstering predictions that the Federal Reserve will forego raising interest rates when it meets next week.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was down 0.1 per cent at 514.37. Tokyo’s Nikkei (.N225) eased 0.22 per cent, while Australia’s S&P/ASX 200 index (.AXJO) lost 0.73 per cent ahead of the Reserve Bank of Australia’s (RBA) policy decision later in the day.

China shares (.SSEC) declined 0.15 per cent, while Hong Kong’s Hang Seng Index (.HSI) was 0.07 per cent lower.

The US services sector barely increased in May as new orders slowed, lowering a gauge of prices paid by firms for inputs to a three-year low, which might help the Federal Reserve combat inflation.

More than two-thirds of the US economy is based on the services industry.

“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 series of economic indicators, along with Fed members’ dovish tone last week, has increased betting on the Fed not raising interest rates at its June 13-14 meeting.

Data released on Friday revealed that nonfarm payrolls in the United States increased by 339,000 in May, but a rise in the unemployment rate to a seven-month high of 3.7 per cent suggested that labour market conditions were improving.

According to the CME FedWatch tool, markets are now pricing in a 77 per cent likelihood of the Fed staying put, up from a 36 per cent chance a week ago.

“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 to give up most of the gains from the previous session after the world’s top exporter, Saudi Arabia, said that it would further cut output. US crude fell 0.25 per cent to $71.97 per barrel and Brent was at $76.55, down 0.21 per cent 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 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 per cent. The yen weakened 0.04 per cent to 139.62 per dollar, while Sterling was last fetching $1.2436, off 0.01 per cent on the day.

The Australian dollar eased 0.02 per cent 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.

But the decision to raise the minimum wage by 5.75 per cent from 1 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 per cent overnight after the US securities regulator sued crypto exchange Binance, in another blow to the industry.

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