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Asian stocks wobble as traders weigh Fed rate pause option

Asian stocks wobble as traders weigh Fed rate pause option


MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was down 0.1%

SINGAPORE (Reuters) - Asian stock markets edged lower on Tuesday as economic data showed U.S. services sector unexpectedly softened, reinforcing 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 (.MIAPJ0000PUS) was down 0.1% at 514.37. Tokyo's Nikkei (.N225) eased 0.22%, while Australia's S&P/ASX 200 index (.AXJO) lost 0.73% ahead of the Reserve Bank of Australia's (RBA) policy decision later in the day.

China shares (.SSEC) declined 0.15%, while Hong Kong's Hang Seng Index (.HSI) was 0.07% lower.

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 inputs to a three-year low, which could aid the Federal Reserve'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.

A string of economic data along with last week's dovish rhetoric from Fed officials have emboldened bets of the Fed refraining from an interest rate hike at its June 13-14 meeting.

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.

Markets are now pricing in a 77% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool.

"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."

In oil markets, prices eased to give up most the gains from the previous session after the world's top exporter, Saudi Arabia, said that it would further cut output. U.S. crude fell 0.25% to $71.97 per barrel and Brent was at $76.55, down 0.21% on the day.

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 greenback against six major peers, eased 0.01%. The yen weakened 0.04% to 139.62 per dollar, while Sterling was last fetching $1.2436, off 0.01% on the day.

The Australian dollar eased 0.02% to $0.661 as traders wait for the policy decision from the country's central bank.

"We expect the RBA to leave the cash rate on hold," analysts at Commonwealth Bank of Australia said in a note.

But the decision to raise minimum wage by 5.75% from July 1 increases the risk the RBA hikes the cash rate by 25 basis points, the CBA analysts wrote.

In cryptocurrencies, bitcoin was last at $25,657.98, having slid over 5% overnight after the U.S. securities regulator sued crypto exchange Binance, in another blow to the industry.