By Ankur Banerjee
SINGAPORE Asian stocks nudged higher on Tuesday as soft U.S. economic data reinforced expectations that the Federal Reserve may skip an interest rate hike when it meets next week.
MSCI's broadest index of Asia-Pacific shares outside Japan was 0.17% higher, shrugging off earlier losses, while Tokyo's Nikkei gained 0.65%.
Futures indicated European stocks were set for a muted open, with Eurostoxx 50 futures down 0.05%, German DAX futures off 0.06% and FTSE futures losing 0.04%.
Australia's S&P/ASX 200 index lost 1%, while the Aussie dollar surged 1% after the central bank raised interest rates by a quarter-point to an 11-year high.
The Reserve Bank of Australia also warned that further tightening may be required to ensure inflation returns to target.
"If May's decision to hike was 'finely balanced', then today's hike should have been a no-brainer given their monthly inflation gauge ripped higher and around a quarter of Australia’s workforce is about to receive a bumper pay rise," said Matt Simpson, senior market analyst at City Index.
The RBA's move sets the stage for a slew of monetary policy decisions from major central banks across the globe, with the Fed, the European Central Bank and the Bank of Japan due to hold their policy meetings next week.
A string of economic data along with last week's dovish rhetoric from Fed officials has emboldened bets of the Fed refraining from an interest rate hike at its June 13-14 meeting.
Markets are now pricing in an 82% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool.
Data overnight showed that the U.S. services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for input to a three-year low, which could aid the Fed's fight against inflation.
The services industry accounts for more than two-thirds of the U.S. economy.
"The index sends another signal that demand is cooling and that the cumulative tightening is working through the economy, giving room to the Fed to pause in June to assess conditions further," said Saxo Markets strategists in a note to clients.
Data on Friday showed U.S. nonfarm payrolls rose by 339,000 jobs in May, but a surge in the unemployment rate to a seven-month high of 3.7% suggested an easing in labour market conditions.
"The tactical risk for equity investors in the very near term is that the Fed indeed skips a meeting and raises rates in July and not June," said Gary Dugan, CIO of Dalma Capital.
"The vibrancy of growth, the debt ceiling as an issue out of the way now, and a slow-moving Fed might just trigger a further rally in equities."
Over in China, rising expectations of policy easing to aid the sluggish economic recovery as well as "candid" talks between senior U.S. and Chinese officials helped lift sentiment. Hong Kong's benchmark Hang Seng was 0.68% higher, while the Shanghai Composite Index was 0.09% lower.
In oil markets, prices eased to give up most gains from the previous session after the world's top exporter, Saudi Arabia, said that it would further cut output. U.S. crude fell 0.26% to $71.96 per barrel and Brent was at $76.58, down 0.17% on the day. [O/R]
Saxo strategists said recession concerns, firmer signs of Fed rate cuts or China stimulus measures may be needed to turn sentiment on the energy markets.
"Still, risks of a tighter market in second half remain with OPEC focused on ensuring market stability."
In the currency market, the dollar index, which measures the greenback against six major peers, fell 0.144%, with the euro up 0.12% to $1.0725.
The yen weakened 0.10% to 139.44 per dollar, while sterling was last fetching $1.2448, up 0.09% on the day.
In cryptocurrencies, bitcoin was last at $25,780, having slid over 5% overnight after the U.S. securities regulator sued crypto exchange Binance, in another blow to the industry.
(Reporting by Ankur Banerjee; Editing by Shri Navaratnam and Sam Holmes)