The greenback and Asian shares rose modestly on Monday after recent data showed a tight job market, indicating that the Federal Reserve will raise interest rates again at its meeting next month.
MSCI's broadest index for Asia-Pacific shares, excluding Japan, experienced a rise of 0.14 percent, while the Nikkei index increased by 0.5 percent. Meanwhile, the markets in Australia, Hong Kong and Europe were closed for Easter, and E-mini futures for the S&P 500 remained flat.
Several other Asian stock markets saw slight gains, with Shanghai, Seoul, Singapore and Taipei all experiencing small increases. Jakarta was the only exception, with a minor decline in its stock market.
The Indian rupee, on the other hand, is experiencing a three-week period of gains, which is attributed to foreign equity inflows and speculative positions. This gain marks the first time in two months that the currency has achieved a weekly close above 82.
China's stock market experienced a slight decline, with the blue-chip CSI300 Index dropping by 0.2 percent, while the Shanghai Composite Index fell by nearly 0.3 percent.
The latest data from the U.S. Department of Labor, released on Friday last week, revealed that nonfarm payrolls had increased by 236,000 jobs in the previous month — falling just short of the 239,000 projected by economists in a Reuters poll.
Inflation report to shape Fed's strategy for combating rising prices
The release of inflation figures on Wednesday is expected to have a crucial role in the Fed's decision-making process during its early May meeting.
While there is anticipation for a rise in interest rates, there are speculations that officials may end their hiking cycle earlier than previously anticipated due to concerns about the banking sector following last month's turmoil.
"Investors are anticipating last month's U.S. bank failures will force the Fed to cut rates but officials warn sticky inflation will make the Fed unlikely to ease policy this year," said Mansoor Mohi-uddin, chief economist at the Bank of Singapore.
The upcoming inflation report will also significantly shape the Fed's strategy for combating rising prices. As concerns about a possible recession grow, investors speculate that the recent banking system turbulence — triggered by the collapse of Silicon Valley Bank — will lead to tighter credit conditions.
Traders are convinced that the Fed will lower interest rates in the second half of the year to avoid an economic downturn. Some analysts, however, note a discrepancy between the Fed's anticipated actions and market projections.
"Not only should high inflation and a still-strong labor market keep cuts unlikely," Citi strategists said. "But we see persistently too-strong inflation as leading to further hikes." Citi expects three further 25 basis point rate hikes.
The section of the U.S. Treasury yield curve that is closely monitored, which measures the difference in yields between 10-year and 2-year Treasury notes, is currently at -57.7 basis points. This indicator reflects economic expectations and has been inverted since July of the previous year. Typically, this inverted yield curve is seen as a predictor of a forthcoming recession.
According to the CME FedWatch tool, the markets are currently estimating a 66 percent probability of a 25 basis point increase in interest rates during the Fed's May 2-3 meeting.
Reuters, on the other hand, reported that the likelihood of a 25-basis point interest rate increase has increased to almost 70 percent. This is due to strong hiring by U.S. employers, which lowered the unemployment rate to 3.5 percent. Yet, annual wage growth is still too high according to the Fed's inflation target.