Speculation is swirling over whether the Bank of Japan will hike interest rates at its meeting this week
Speculation is swirling over whether the Bank of Japan will hike interest rates at its meeting this week AFP

Asian markets rallied Monday, tracking a surge on Wall Street after data showing US inflation slowed further in June stoked hopes the Federal Reserve will cut interest rates.

The upbeat mood comes at the start of a busy week for traders, with the central banks of the United States and Japan making policy decisions, a key US jobs report due on Friday and megacaps releasing their earnings.

The gains helped claw back some of the hefty losses suffered last week after disappointing results from tech titans Tesla and Alphabet caused panic-selling among investors who had piled into the sector this year.

All three main indexes in New York jumped more than one percent Friday after the Fed's preferred gauge of inflation, the personal consumption expenditures (PCE) index, slowed to 2.5 percent last month.

The reading, which was just above officials' two percent target, was the latest to boost bets on a rate cut in September and pushed up expectations for two more before January.

Fed chief Jerome Powell sparked a rally in markets this month when he said decision-makers did not need to see the reading hit two percent before moving.

The bank is due to make an announcement Wednesday, ahead of the release of the closely watched non-farm payrolls report Friday.

"Incoming data ahead of the July (Fed policy) meeting could not have been better: consumption rebounded in June after a weak start into the second quarter," said Christian Scherrmann at DWS.

"Lower-than-expected gains in inflation for the same month pleased both consumers and central bankers. Meanwhile, it appears that labour markets remain on track towards a better balance."

However, analyst Stephen Innes said there were still risks ahead.

"It's a week to buckle up. A significant downside miss on the NFP could spell 'bad news is bad news' for stocks," he said in his Dark Side Of The Boom newsletter.

"While an upside beat might reduce the chances of one of those Fed rate cuts baked into the 2024 cake. This could strengthen the US dollar and spoil everyone's rate-cut party."

Asian investors were in a buoyant mood at the beginning of the week.

Tokyo piled on more than two percent after eight days of losses, while Hong Kong gained more than one percent.

Sydney, Seoul, Singapore and Taipei were also up, while Shanghai was flat.

London, Paris and Frankfurt rose at the open.

Mumbai, Manila and Wellington dipped.

The Bank of Japan is also lined up to make an announcement Wednesday amid speculation it will hike rates again, having done so in March for the first time in 17 years as it shifts away from its ultra-loose policy.

Expectations for a rise, either this week or at the BoJ's next meeting, along with bets on a Fed cut, have helped push the yen higher against the dollar after it hit a four-decade low near 162 per dollar at the start of the month.

Still, analysts at Moody's Analytics said: "We expect the Bank of Japan to leave interest rates on hold.

"The spotlight will be on the reduction in government bond purchases announced in June. With inflation cooling and economic data underperforming, a rate hike now would be premature.

"We're betting on a rate hike in September; by then, economic indicators should be showing an improvement."

Tokyo - Nikkei 225: UP 2.1 percent at 38,468.63 (close)

Hong Kong - Hang Seng Index: UP 1.5 percent at 17,279.02

Shanghai - Composite: FLAT at 2,891.85 (close)

London - FTSE 100: UP 0.7 percent at 8,341.50

Dollar/yen: DOWN at 153.36 yen from 153.75 yen on Friday

Euro/dollar: DOWN at $1.0857 from $1.0859

Pound/dollar: DOWN at $1.2866 from $1.2875

Euro/pound: UP at 84.38 pence at 84.32 pence

West Texas Intermediate: UP 0.6 percent at $77.63 per barrel

Brent North Sea Crude: UP 0.7 at $80.81 per barrel

New York - Dow: UP 1.6 percent at 40,589.34 (close)