Asian markets were mixed Wednesday after data showed US inflation fell further last month, ramping up expectations the Federal Reserve will finally pause its interest rate hike campaign.
Still, Hong Kong and Shanghai struggled as investors kept tabs on China with speculation swirling that leaders will unveil a batch of measures to support the world's number two economy, with a focus also on Beijing's own monetary policy decision later in the week.
The sharp drop in the US consumer price index was slightly more than forecast and followed a string of recent readings that suggested 15 months of central bank tightening were beginning to kick in.
It also came after a mixed jobs report earlier this month that showed the labour market remained resilient but gave the Fed room to skip a hike in June.
The 4.0 per cent CPI reading marks the lowest since March 2021, though it is still double the Fed's target.
Traders are now pricing the chances of a rate hike on Wednesday at about 10 per cent, with analysts saying bank boss Jerome Powell will try to drive home that the pause would not signal the end of tightening.
"Decelerating inflation... coupled with full employment may suggest to some that the US is on a path to a soft landing of its economy and avoiding the recession that so many have been concerned about is looming for over a year now," said Stephen Innes at SPI Asset Management.
"We expect the Fed will pause its rate hiking cycle at this week's meeting to give more time to gauge lagged policy effects and to assess how restrictive March's regional banks turmoil has been on lending markets.
"So, let the July debate begin."
Lindsey Piegza, of Stifel Nicolaus & Co, said the Fed was now bound to stand pat, warning it "opened the door for a pause and to not walk through that door now would cause unnecessary concern. But they are going to have to communicate their work is not done".
Wall Street welcomed Tuesday's reading, with the S&P 500 clocking up a fourth straight gain and putting it within touch of the 4,400-point mark it has not hit since April 2021.
Asia initially followed suit, though some markets fell back as the day progressed.
Tokyo, Sydney, Singapore, Wellington, Taipei, Mumbai and Bangkok all rose but Hong Kong, Shanghai, Seoul, Manila and Jakarta dipped.
London slipped at the open even as data showed the UK economy returned to modest growth in April on strong consumer spending.
Paris and Frankfurt were flat.
China stimulus speculation
Investors are also keeping an eye on developments in Beijing as reports swirl that authorities are preparing a raft of measures to kickstart the struggling economy.
A surprise central bank decision Tuesday to cut a short-term lending rate fanned talk of a similar move for the medium-term rate later in the week.
Analysts said officials could also lower the amount of cash lenders must keep in reserve, in order to push more cash into financial markets.
Aisa Ogoshi, at JPMorgan Asset Management, told Bloomberg Television: "We cannot expect the kind of stimulus that we’ve seen in the past, i.e. the property sector-led stimulus."
She foresaw support measures focusing on consumers, adding that "the macro backdrop is good for stock pickers".
Crude prices extended Tuesday's rally of more than three per cent fuelled by the prospect of a US rate pause and Chinese stimulus.
OANDA's Edward Moya said the China rate cut "sent a message to traders that the world's second largest economy is finally going to get significant stimulus that should help with their struggling post-Covid recovery".
"In addition to China's stimulus, energy traders are anticipating the impact from the Saudi oil price cuts to tighten the market quickly next month."
