SINGAPORE (Reuters) - Asian stocks crept higher on Tuesday and the dollar lurked near a five-month low as cooling US inflation bolstered bets the Federal Reserve would cut interest rates early next year.
Oil prices were mixed after both benchmarks - Brent crude and US West Texas Intermediate crude - rose 3% last week in the wake of Houthi attacks on ships that disrupted global shipping and trade, as the Israel-Gaza conflict raged on.
Trading was thin on the day after Christmas with several markets, including those in Australia, Hong Kong, Britain and Germany closed for Boxing Day and the holiday-curtailed week is also likely to see limited moves.
MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was 0.48% higher and is on course for a nearly 2% gain this year, after dropping 20% in 2022.
Japan's Nikkei (.N225) gained 0.16% and remains the best-performing major Asian stock market with a 27% rise in 2023. E-mini futures for the S&P 500 rose 0.15%.
Investors were still digesting data released on Friday that showed US prices fell in November for the first time in more than 3-1/2 years, underscoring the economy's durability.
Inflation, as measured by the personal consumption expenditures (PCE) price index, fell 0.1% last month.
"In a way, markets could not have asked for better news from the continued easing of the core PCE deflator in November," said Nicholas Chia, Asia macro strategist at Standard Chartered.
"Thin liquidity conditions are likely to exacerbate the so-called 'Santa Claus rally' in equities ahead of the turn of the year," Chia added.
The end of the year tends to be a strong period for stocks, a phenomenon dubbed the "Santa Claus Rally."
Stock investors have cheered recent signs from the Fed on the outlook for rates. After its policy meeting on Dec. 13, the Fed signalled that it had reached the end of its tightening cycle and opened the door to interest rate cuts in the coming year.
Markets are now pricing in a 75% chance of a 25 basis points rate cut from the Fed in March, according to the CME FedWatch tool, compared with a 21% chance at the end of November. Markets are also pricing in more than 150 basis points of rate cuts next year.
"The Federal Reserve has aggressively changed its rhetoric to engineer a significant easing of financial conditions," Citi analysts said in a note.
"A combination of slower core inflation and rising recession concerns led Fed officials to shift rhetoric away from a commitment to fight inflation with higher-for-longer rates and toward reassuring markets that they will not 'hang on' to higher rates for too long."
In Asia, China stocks (.SSEC) fell 0.47%, weighed down by semiconductor shares, while gaming stocks stabilised after a slew of companies announced share buyback plans. Hong Kong's Hang Seng Index (.HSI) remained closed.
In the currency market, moves were muted in holiday-thinned trade, with the dollar index at 101.61, not far from the five-month low of 101.42 it touched on Friday. The index is down 1.8% for the year, on course to snap its two-year winning run.
The yen meanwhile was steady at 142.27 per dollar. The prospect of the Bank of Japan (BOJ) soon ending its ultra-easy policy has helped lift the currency in recent weeks.
The Asian currency is up 4% this month, on course for a second straight month of gains against the dollar. But for the year, the yen remains down 7.8% against the greenback.
Bank of Japan Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank's inflation target was "gradually rising" and it would consider changing policy if prospects of sustainably achieving the 2% target increase "sufficiently".
In commodities, US WTI crude futures rose 0.33% to $73.80 per barrel and Brent futures were at $79.33, down 0.08% on the day.
Spot gold added 0.5% to $2,064.02 an ounce.