SYDNEY (Reuters) – Asian shares were trying to end a tough week on a bright note after Wall Street bounced and data showed China taking a step away from deflation, while Japanese stocks fought to sustain an early rally.
The Nikkei rose as much as 2.4% early in the session before falling into the red and then edging up 0.6%. It has erased most of the losses from a 13% crash on Monday and finished the week 3% lower.
The yen also veered from negative to positive through the session, last up 0.3% at 146.90 per dollar.
Wall Street futures also turned lower, with Nasdaq futures last down 0.1%. Europe is still set for a higher open, with both EUROSTOXX 50 futures and FTSE futures added 0.2%.
MSCI's broadest index of Asia-Pacific shares outside Japan climbed 1.8%, more than reversing the drop from Thursday. For the week, it has reversed earlier losses to be largely flat.
Overnight, data showed US jobless claims fell more than expected last week, suggesting fears the labor market is unraveling were overblown. That led markets to pare back the chance of an outsized half-point rate cut from the Federal Reserve in September to 54% from 69% a day earlier.
Stocks had sold off sharply after last week's US jobs report sparked fears of a potential US recession, but investors have bought into the recent dip, with the Nasdaq 3% higher overnight and S&P 500 up 2.3%.
Also helping sentiment is Chinese data showing that consumer inflation ran at 0.5% in July, above forecasts of a gain of 0.3%, suggesting there is less risk of the economy sliding into outright deflation.
Chinese blue chip stocks rose 0.1%, and Hong Kong's Hang Seng index jumped 1.5%.
"The prospect of better-than-feared US growth and a weaker yen constrain the fundamental and technical risks that inspired the extreme volatility experienced at the start of the week," said Kyle Rodda, a senior financial market analyst at Capital.com.
"It's unlikely that the markets have turned the corner yet. Whether this week's volatility is an omen of deeper downside or merely a growth scare will depend on the August Non-Farm Payrolls report and whether it reveals further deterioration in labour market conditions."
A few Federal Reserve officials said they were increasingly confident that inflation is cooling enough to allow interest-rate cuts ahead, but not because of the recent market rout.
Kansas City Fed President Jeff Schmid, one of the more hawkish policymakers, said he viewed the current policy stance as "not that restrictive", the economy resilient and labour market still quite healthy.
"If inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy," said Schmid.
The US dollar gained as markets gave up bets on an emergency rate cut from the Fed, and is set for a 0.4% gain on yen this week, despite Monday's precipitous 1.5% plunge.
The yen had gained earlier in the week following a surprise rate hike by the Bank of Japan, which led to the unravelling of the popular carry trade – where investors borrow yen at low rates to buy higher yielding assets - but that seemed to be stabilising.
The BOJ's reassurance that it will not be hiking interest rates amid market volatility also helped sentiment recover.
Commodity Futures Trading Commission figures later on Friday will give a clearer indication of whether that unwinding has now run its course.
Bond yields have climbed this week with safe havens in less demand. U.S. 10-year yields held at 3.997%, well off Monday's low of 3.667%, and were set for a weekly gain of 20 basis points.
Two-year yields were up 17 bps this week to 4.0440%.
In commodities, crude oil was little changed on Friday but are set for decent weekly gains on supply fears amid the widening conflict in the Middle East as Israel waits for a threatened attack from Iran and its proxies.
Brent crude futures held at $79.09 a barrel, but were up more than 3% for the week, while US West Texas Intermediate crude was at $76.17, also up over 3% for the week.
Gold prices eased, down 0.4% at $2,417.96 an ounce.