SYDNEY: Most Asian shares tracked Wall Street lower on Thursday, as a number of Federal Reserve speakers echoed Chair Jerome Powell in saying that interest rates are set to go higher, capping risk sentiment, while the dollar hovered near one-month highs.
Chinese shares, on the other hand, outperformed as jitters around the spy balloon incident abated and some analysts upgraded growth forecasts for the world's second largest economy.
Risk appetite looks set to rebound in Europe when markets open - the pan region Euro Stoxx 50 futures was last up 0.4%.
Both S&P 500 futures and Nasdaq futures rose 0.2%.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1%, as gains in Chinese shares offset some of the declines seen elsewhere. Japan's Nikkei fell 0.2%.
China's blue chips rose 0.8%, pulling away from its one-month trough, while Hong Kong's Hang Seng Index was up 0.4%.
Barclays upgraded their forecast of China's economic growth to 5.3% this year, from 4.8% previously, while Fitch revised up their forecasts on China's economic growth this year to 5%. Both cited accelerated recovery in consumer spending.
Swiss bank UBP has revised its forecast this year to 6% from 5.2% previously.
"We expect the pace of recovery to strengthen further in Q2 on improving infrastructure investment and a gradual recovery in the housing market, before normalising in H2," said analysts at Barclays.
President Biden said on Wednesday that relations with China have not taken a big hit after Washington downed a suspected Chinese spy balloon, allowing investors to heave a sigh of relief that ties between the world's two largest economies have stabilised for now.
Overnight, sentiment took a hit as Alphabet Inc shares fell 7.7% after its new AI chatbot Bard delivered an incorrect answer in a promotional video, dragging the S&P 500 and Nasdaq lower by more than 1%.
Adding to the cautious mood, Federal Reserve officials said more interest rate rises are on the cards as the U.S. central bank moves ahead with efforts to control inflation. None hinted though that January's strong jobs report could drive more aggressive policy actions.
"Now that inflation has passed its peak and many central banks have begun to slow the pace of policy tightening, markets are back to scouring their communications for evidence of what's to come," said Jennifer McKeown, chief global economist at Capital Economics.
"But despite the strong push for transparency over the past two decades, central banks are struggling to convey the right message with conflicting data adding to confusion about the inflation outlook in a post-pandemic world."
On Wednesday, New York Fed President John Williams said moving to a federal funds rate of between 5.00% and 5.25% "seems a very reasonable view of what we'll need to do this year in order to get the supply and demand imbalances down."
Governor Christopher Waller said the battle to reach the Fed's 2% inflation target "might be a long fight". But Governor Lisa Cook said the big job gains in January with moderating wage growth increased hopes of a "soft landing".
Investor focus will now switch to the U.S. jobless claims later in the day and inflation data due next week on Tuesday.
The bond market rallied a little after being caught wrongfooted by the January blockbuster U.S. jobs report, forcing many to reposition for a higher peak in the Fed funds rate.
The two-year Treasury yield, which rises with traders' expectations of higher Fed fund rates, eased 2 basis points to 4.4337% on Thursday, while the yield on benchmark 10-year Treasury notes slid 4 basis points to 3.6%.
Futures are pricing in the Fed's target rate to peak at 5.122% in July, about 25 basis points higher than last week, and that by December it will have declined to 4.804%, a jump of about 40 basis points since a week ago.
In the currency markets, movements were rather muted. The dollar index slid 0.1% but held close to a 1-month high at 103.33 against major peers, after last week's stunning jobs and services data.
In the oil market, Brent crude futures eased 0.1% to $85.02 while U.S. West Texas Intermediate (WTI) crude also settled 0.1% lower at $78.39.
Gold was slightly higher. Spot gold traded at $1,879.55 per ounce. - Reuters