Tokyo: Stocks in Asia are set to start May lower after renewed concerns that the US Federal Reserve will keep interest rates higher for longer helped fuel a sell-off in US benchmarks and boosted bond yields and the US dollar.

Equity futures for Tokyo and Sydney pointed to drops of at least 1%, with many markets in the region closed for public holidays yesterday.

The S&P 500 fell the most since January after a jump in a broad gauge of US labour costs closely watched by policymakers reinforced bets that officials will keep rates unchanged at a two-decade high - and are unlikely to lower them anytime soon. US stock futures slipped in early trading.

An index of the US dollar jumped the most in more than two weeks on Tuesday, partly fuelled by another drop in the yen.

Treasury two-year yields reached the highest level since November, while Australia’s 10-year yield jumped six basis points early yesterday.

“The markets are in full fear-mode” before the Fed announcement, said Andrew Brenner at NatAlliance Securities.

“Rates won’t go down in the near future and equities are having trouble justifying their prices.”

The last time Fed chair Jerome Powell spoke, he pointed to the lack of further progress in bringing inflation down and to enduring strength in the labour market.

The latest inflation signals - in tandem with expectations for a robust employment report tomorrow - aren’t likely to lead him to change his tune.

A plunge in consumer confidence further weighed heavily on US equities - which suffered their worst month since September. In late hours, Amazon.com Inc reported strong sales for its cloud unit amid rising artificial-intelligence demand.

Advanced Micro Devices Inc, the second-biggest maker of computer processors, gave a lukewarm revenue forecast for the current period.

“Stocks, bonds, and the US dollar are all frontrunning the possibility of a frowning Powell at the interest rate decision,” said Jose Torres at Interactive Brokers.

“This morning’s data justifies an increasingly hawkish committee.”

A survey conducted by 22V Research shows that only 16% of investors polled expect a “risk-on” reaction to the Fed decision, 44% said “risk-off,” and 40% “negligible/mixed.” The tally also revealed that two-thirds of respondents still expect a rate cut in 2024.

“With inflation data continuing to be surprisingly hot for the past quarter, the narrative that these surprises are all attributable to ‘one offs’ in individual components is becoming harder to sustain,” said Joe Davis at Vanguard. “Time will tell, but the data suggest that what we call a ‘deferred landing’ is more likely than the long anticipated ‘soft landing’.”

Sticky US inflation this year isn’t necessarily bad news for the stock rally as higher yields are a reflection of strong economic growth, according to HSBC strategists led by Max Kettner.

“If the Fed’s cuts turn out to be more like the recalibration in the mid-1990s and 2019, it may not necessarily be bad news for risk assets,” they said.

In other markets, gold edged higher early yesterday after extending its decline from a record high reached in mid-April. Oil continued to slip as the potential for a cease-fire in the Middle East eased geopolitical tensions.

Copper declined on Tuesday as traders turned their attention to demand conditions in China while cocoa crashed amid volatility and lack of liquidity.

 - Bloomberg