Nikkei surfs Wall Street wave to new record high

Sydney — Japan’s Nikkei hit a fresh record high on Friday, buoyed by the bounce on Wall Street as a key US inflation reading was in line with expectations, while markets elsewhere in Asia were more subdued on China’s still-uncertain economic outlook.

The Nikkei index gained 1.8% to hit a new record high, extending a surge of 7.9% in February when it breached levels last seen in 1989. Australia’s resources-heavy shares also hit a record high and were last up 0.3% on the day.

MSCI’s broadest index of Asia-Pacific shares outside Japan, however, fell 0.1%, weighed down by a 0.2% drop in Hong Kong’s Hang Seng index. The Asia index is set for a weekly loss of 1%.

Data on Friday showed China’s factory activity contracted for a fifth consecutive month in February, while the expansion in the services sector picked up pace, highlighting an uneven recovery for the world’s second-largest economy.

“The PMI [purchasing managers index] is less reliable in Feb because of the Chinese New Year holiday makes it difficult to get a clear picture of economic momentum,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“We need to wait for more macro data on retail sales and industrial production in January-February to get a clear view on the economy.”

China’s mainland markets were tentative, with both the blue chips and Shanghai Composite index mostly flat on the first day of March. Investors are on the lookout for further stimulus at a key policy meeting next week.

Japan’s factory activity shrank at the fastest pace in more than three-and-a-half years in February, a private-sector survey showed on Friday.

Overnight on Wall Street, the S&P 500 and Nasdaq closed at record highs. The US personal consumer expenditures (PCE) price index, the Federal Reserve’s preferred gauge for inflation, rose 0.3% in January from a month earlier. The core PCE price index rose 0.4%, as expected.

That kept the prospects of a June interest rate cut alive. Markets still see a 76% probability the Fed will start cutting interest rates in June, with a total easing of 82 basis points (bps) priced in for 2024.

“The PCE data confirms the unhelpful January inflation surprise already previewed by earlier CPI [consumer price index] and PPI [producer price index] numbers,” said Taylor Nugent, a senior economist at National Australia Bank.

“We don’t think the disinflation trend has been arrested, but there is some risk support from residual seasonality issues in the January increase also bleeds into February.”

Further aiding sentiment, Fed speakers overnight reiterated that policymakers will look through recent data that showed price pressures rebounded in January to focus on overall progress on inflation.

In Europe, inflation readings in Germany, France and Spain all eased, mostly in line with expectations, which should bode well for the eurozone inflation data due later on Friday.

That drove a fall in the euro, which was hovering at $1.0809, having eased 0.3% overnight.

The yen slipped 0.2% to ¥150.23. It gained 0.5% overnight after a Bank of Japan (BOJ) board member, Hajime Takata, said sustained achievement of 2% inflation was already in sight.

However, BOJ governor Kazuo Ueda later struck a more cautious tone, saying that it was too early to conclude that sustained achievement of the central bank’s 2% inflation target can be foreseen.

Bonds rallied in relief that the US PCE data was not worse than expected. The 10-year treasury yield held at 4.2639% after edging 4bps lower overnight. It jumped 29bps last week as markets pushed back bets on early rate cuts.

The two-year treasury yield, which reflects interest rate expectations, was also flat at 4.6373%, having eased 4bps to 4.644%.

Oil prices edged up on Friday. Brent rose 0.4% to $82.21 a barrel, while US crude gained 0.3% to $78.47 a barrel.

The spot gold price was flat at $2,043.99/oz.

Reuters