Shares, bonds rally as markets await signals for Fed rates

Asian markets witnessed a brief respite on Thursday as investors awaited further US economic data and commentary from central bankers. Japanese government bonds retreated from their record highs, mirroring a recent recovery in US Treasuries, leading up to a Tokyo auction of super-long debt. The yen managed to hold onto its recent gains while oil prices dipped from their recent highs due to uncertainty surrounding potential military action between the US and Iran.

Market attention was now squarely on Friday's release of the US payrolls report, which has been underwhelming compared to expectations. Federal Reserve Governor Christopher Waller was set to address the Fed's New York branch, while John Williams, president of the Federal Reserve Bank of New York, had tempered expectations for an interest rate hike that month.

Gavin Friend, a senior markets strategist at NAB, highlighted the potential positive impact of resolving the ongoing conflict, suggesting it could help lower bond yields globally and allow central banks to consider normal policy approaches once again. The MSCI's Asia-Pacific index outside Japan climbed 0.5%, following a slightly positive close for US stocks.

The dollar index dropped 0.05% to 99.54, while the euro edged up 0.02% to $1.1589, and the yen strengthened 0.07% to 158.59 per dollar, following a 0.9% surge the previous day. US Treasury yields softened after reaching multi-year peaks overnight. The yield on the benchmark 10-year note fell 0.99 basis points to 4.784%, and the 30-year Japanese government bond yield dropped 10 basis points to 4.065%, following a near-record high before Japan's Ministry of Finance auctions the securities later in the day.

Traders remained cautious about Middle East developments after the US and Iran engaged in their most significant exchange of attacks since July, reigniting concerns about a wider regional escalation. US crude oil slipped 0.3% to $90.74 a barrel, and Brent crude fell 0.44% to $95.21 per barrel. Gold rose 0.32% to $4,400.47 an ounce, while silver increased 0.51% to $65.65 an ounce.

Speculation on a Federal Reserve rate increase has risen, with traders now giving a roughly two-thirds chance of a 25-basis-point hike this month, up from 37% a week earlier, according to CME Group's FedWatch tool. Fed Governor Williams mentioned on Wednesday that rising long-term bond yields signal a strong economy, stating he was still gathering information to inform his next policy decision.

Economic indicators, such as Japan's services sector expanding at its fastest pace in five months in August, suggest the economy is robust enough to withstand potential BOJ rate hikes. In early European trading, the Euro Stoxx 50 futures fell 0.02%, the German DAX eased 0.01%, and the FTSE futures declined 0.1%. US stock futures, the S&P 500 e-minis, remained unchanged at 7,676.3.