Photo/Illutration The Bank of Japan head office in Tokyo's Chuo Ward (Asahi Shimbun file photo)

SINGAPORE--Asian equities rose on Tuesday led higher by Chinese tech firms although investors’ main focus was on key U.S. inflation data, while expectations that the Bank of Japan may be ready to exit ultra-easy policy as soon as next week weighed on the Nikkei.

Gold held just below its record peak and the dollar was steady as traders awaited the U.S. consumer price index later in the day to gauge when the Federal Reserve would likely start its rate cutting cycle.

European bourses are set for a strong open, with the Eurostoxx 50 futures up 0.57%, German DAX futures up 0.57% and FTSE futures 0.74% higher.

The spotlight during Asian hours was firmly on Japan after the BOJ refrained from purchasing Japanese exchange-traded funds on Monday even as local shares dropped sharply, stoking speculation a shift away from ultra-loose monetary policy is right around the corner.

A growing number of BOJ policymakers are warming to the idea of ending negative interest rates this month, four sources familiar with the central bank’s thinking told Reuters last week.

The changing expectations have helped the yen perk up over the past week and sent the Nikkei beyond the record peak struck last week.

But on Tuesday, the Nikkei closed 0.06% lower, having dropped 1% during the session, while the yen weakened 0.41% to 147.51 per dollar after Bank of Japan Governor Kazuo Ueda hedged his optimism about the economy ahead of the central bank’s policy meeting next week.

Futures now imply a 47% chance the BOJ will shift rates to zero at its meeting on March 18-19, though some still think it might wait until its April 26 meeting.

“The question for investors is whether the BOJ will stop at ending negative rates or start a tightening cycle. We think the former,” Frank Benzimra, head of Asia equity strategy at SocGen told the Reuters Global Markets Forum.

Elsewhere, Chinese stocks rose, with Hong Kong’s Hang Seng Index up 2.6% led by the tech sector, while the blue-chip CSI300 index inched up 0.23%.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.8% to its highest in more than seven months.

INFLATION WATCH

Investor focus will switch to U.S. inflation data due later on Tuesday, with expectations for a monthly increase of 0.4% and 3.1% on an annual basis. Core consumer prices are seen rising 0.3%, which would nudge the annual pace down to 3.7%.

Vasu Menon, managing director of investment strategy at OCBC Bank in Singapore, said if the data comes in higher-than-expected, that could worry investors, but such concerns may be short-lived.

“Markets have come to realize that the path ahead for inflation will be uneven, and higher-than-expected data for one or two months may not alter the medium-term outlook for inflation which is in a broad downtrend.”

Market are all but certain that the U.S. central bank will not cut rates when it meets next week but have priced in more than a 70% chance of a rate cut in June, CME FedWatch Tool showed. Traders are pricing in 90 basis points of cuts this year.

Nicholas Chia, Asia macro strategist at Standard Chartered, said a “soft-ish inflation report” should give markets some relief, sealing the debate over further Fed hikes on concerns of a re-acceleration in price pressures.

“A Fed adamant on cutting rates in the coming months to dial back policy restriction should also provide another leg-up to the risk rally.”

A stronger majority of economists in the latest Reuters poll also expect the Fed to start cutting rates in June. The survey showed respondents saw it more likely that if Fed policymakers changed their rate projections at the March meeting, the median view would signal fewer cuts this year, not more.

The yield on 10-year Treasury notes eased a bit to 4.094%, while the dollar index, which measures the U.S. currency against six rivals, was little changed at 102.82, having hit a roughly two-month low of 102.33 last week.

Spot gold eased a bit to $2,175.79 an ounce but was not far from the record high of $2,194.99 it touched last week.

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