Asian shares follow Wall St gains on cooler inflation data

Stocks were mostly higher in Asia on Wednesday after a rally on Wall Street boosted by news that US inflation cooled more than expected last month.

November’s consumer price index reading of 7.1% boosted hopes on Tuesday for easing pressure on the economy ahead of an update on interest rate policy by the US Federal Reserve.

The Fed is expected to raise its benchmark rate by half a point on Wednesday, smaller than the past four increases of three-quarters of a point.

Also on Wednesday, the Bank of Japan’s quarterly “tankan” survey showed a deterioration in business conditions at major Japanese manufacturers, reflecting higher costs of industrial inputs and energy and weaker demand as the Fed and other central banks raise interest rates to control inflation.

The main index of large manufacturers was 7, down from 8 in the previous quarter and the fourth consecutive quarter of declines. The tankan measures corporate sentiment by subtracting the number of companies that say business conditions are negative from those that say they are positive.

Conditions for non-manufacturers such as service industries rose to 19 from 14 as Japan lifted pandemic precautions and reopened to foreign tourists.

“Today’s Tankan survey suggests that while the services sector is strengthening, the outlook for the manufacturing sector continues to worsen,” Capital Economics’ Darren Tay said in a comment, noting that projections of capital expenditure also weakened slightly.

Tokyo’s Nikkei 225 advanced 0.7% to 28,156.21 and Hong Kong’s Hang Seng rose 0.6% to 19,722.16. South Korea’s Kospi rose 1.1% to 2,399.25.

The Shanghai Composite Index fell 0.1% to 3,172.33.

In Australia, the S&P/ASX 200 gained 0.7% to 7,251.30. India’s Sensex gained 0.7% while Bangkok’s SET added 0.6%.

On Tuesday, the S&P 500 rose 0.7% to 4,019.65 and the Nasdaq composite rose 1% to 11,256.81. The Dow Jones Industrial Average rose 0.3% to 34,108.64.

Small-cap stocks also gained ground. The Russell 2000 rose 0.8% to 1,832.36.

Stocks pared gains as analysts warned investors not to get carried away by hopes of an easier Fed, as they have done in the past.

The breakdown of inflation data “under the hood is less encouraging than on the surface,” Mizuho Bank economists said in a report, noting that prices for basic services rose 0.4 percent from previous month, distorting inflation risks.

“To be precise, the headline understates the underlying inflation risks of concern to the Fed,” the report said.

Tuesday’s report offered hope that the worst of inflation was indeed over over the summer, although inflation remains painfully high and shoppers are paying prices well above year-ago levels.

A 0.50 percentage point Fed rate hike would normally be a big deal because it’s twice the typical move. But with inflation falling from its worst level in generations, it would be a step below the four 0.75 percentage point hikes the Fed has approved since the summer.

Some of the wildest action on Wall Street on Tuesday was in the bond market, where yields fell sharply immediately after the inflation report was released.

The yield on the 10-year Treasury, which helps set rates on mortgages and other major loans, fell to 3.48 percent from 3.62 percent on Monday afternoon. The two-year yield, which more closely tracks Fed expectations, fell to 4.22% from 4.39%.

Other central banks around the world, including the European Central Bank, are also likely to raise their own rates by half a percentage point this week.

Even if inflation is finally easing, the global economy is still threatened by rate hikes that have already been boosted. The housing sector and other businesses that rely on low interest rates have shown particular weakness, and concerns are mounting about the strength of business profits in general.

In other trading, benchmark U.S. crude lost 30 cents to $75.09 a barrel in electronic trading on the New York Mercantile Exchange. It rose $2.22 on Tuesday to $75.39 a barrel.

Brent crude, the benchmark for international trade, was down 34 cents at $80.34 a barrel.

The dollar fell from 135.59 yen to 135.43 Japanese yen. The euro rose to $1.0638 from $1.0633.

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