Asian stocks at two-week peak as focus turns to PMIS

Asian stocks crept to two-week highs in cautious trade yesterday, helped by hints of progress toward avoiding a US default and by resilience in Japan's economy, with industrial sector surveys in Europe and the US in focus later in the day.

MSCI'S broadest index of Asia-pacific shares outside Japan touched its highest since May 9, and was up about 0.3 per cent. Japan's Nikkei extended its winning streak into a ninth session and rose 0.6 per cent.

S&P 500 futures advanced 0.2 per cent and European futures rose 0.16 per cent.

President Joe Biden and House Speaker Kevin Mccarthy could not reach an agreement on Monday on how to raise the US government's US$31.4 trillion debt ceiling with just 10 days before a possible default, but vowed to keep talking.

"The resumption of debt ceiling negotiations spurred some hopes despite distinct risks of brinkmanship and blame-shifting remaining on the cards," said Mizuho economist Vishnu Varathan.

"Without real action on that front, hawkish Fed speak has (had) some sway on markets," he said, noting some pressure on US Treasuries that has also leant support to the dollar.

Ten-year and two-year US yields are near highs not seen since March, as traders start pushing back expectations for US rate cuts from July towards November or December.

Minneapolis Federal Reserve President Neel Kashkari said overnight that it was a "close call" as to whether he'd vote to hike again or pause at next month's meeting.

St. Louis Fed President James Bullard said another 50 basis points of hikes might be required.

Benchmark 10-year Treasury yields rose for a seventh straight session on the remarks to hit 3.728 per cent overnight, and held steady near that level in Asia.

Two-year yields were last at 4.328 per cent.

The dollar touched a six-month high against the yen yesterday as expectations grew that US rates will remain higher for longer and as the debt ceiling impasse kept risk sentiment fragile.

Against the Japanese yen, the greenback rose to a near sixmonth peak of 138.88 in Asia trade, reflecting the stark contrast between a still-hawkish Fed and an ultra-dovish Bank of Japan. The dollar was last 0.11 per cent lower at 138.44 yen.

"Markets are pricing for higher rates for longer by the Fed," said Tina Teng, market analyst at CMC Markets. "US inflation is still way above the target ... and near-term, the economy is running resilient.

"I don't think the Fed will just start cutting rates anytime soon."

Money markets are pricing in a roughly 20 per cent chance that the Fed will deliver another 25-basis-point hike next month and have scaled back expectations of Fed rate cuts later this year, with rates seen holding above 4.7 per cent by December.

Similarly, the greenback kept the offshore yuan pinned near its recent five-month low and it last bought 7.0586.

China on Monday kept its benchmark lending rates unchanged, as a weakening yuan and widening yield differentials with the US limited the scope for any substantial monetary easing to shore up the country's POSTCOVID economic recovery.

The euro slipped 0.05 per cent to $1.0808 and is down nearly 2 per cent for the month thus far against a stronger dollar, reversing two straight months of gains.

Sterling was largely unchanged at $1.2436.

Japan's manufacturing activity expanded for the first time in seven months in May, survey data yesterday showed, while the service-sector hit record growth, as the POST-COVID recovery gains traction.

Purchasing Managers Index surveys are due in Europe, Britain and the US later in the day and strong services growth is expected to hold the composite readings in expansionary territory.

Commodities were broadly steady, though US natural gas fell sharply overnight.

Benchmark Brent crude futures rose 0.4 per cent to $76.26 a barrel. Spot gold fell 0.4 per cent to $1,960 an ounce. Overnight the S&P 500 was flat.