SINGAPORE: Asian stocks fell on Friday as strong U.S. economic data bolstered the prospect of interest rates staying higher for longer and the Federal Reserve taking its time in cutting rates, keeping investors away from risky assets.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1% and was on course for a 1.5% weekly decline, snapping its four-week winning streak. Japan's Nikkei fell 1%.

The risk-averse mood is set to continue in Europe, with the Eurostoxx 50 futures down 0.44% and FTSE futures 0.75% lower.

Data on Thursday showed U.S. jobless claims dropped while S&P Global's Flash PMI survey showed business activity expanded faster than economists forecast in May.

The robust economic data along with hawkish minutes from the Fed's last meeting earlier in the week has led traders to dial back their bets on rate cuts this year.

"This week's data reaffirms the Fed simply does not have the capacity to provide policy accommodation," said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.

Markets are now pricing in just 35 basis points of easing in 2024, versus expectations of 150 bps of cuts at the start of the year, with a rate cut fully priced-in only in December.

Atlanta Fed President Raphael Bostic said the U.S. central bank may need to wait longer to cut interest rates because even with April's slightly cooler inflation reading there is continued upward pressure on prices.

"Investors and traders who have become hopeful of a rate cut have also become hypersensitive to each key economic data point, which has caused rate cut expectations to become very volatile," said Vasu Menon, managing director of investment strategy at OCBC.

"The waiting game is likely to continue for a bit longer as markets flip back and forth between US growth and inflation."

China stocks fell, with the blue chip stocks 0.43% lower as China's military started its second day of war games around Taiwan on Friday. Hong Kong's Hang Seng Index was 1.27% lower.

The changing expectations around U.S. rates has lifted yields, with benchmark U.S. 10-year yield touching a more than one-week peak of 4.498% on Thursday. It was last at 4.466% in Asian hours on Friday.

The dollar has also benefited, with the dollar index, which measures the U.S. currency against a basket of six major peers, up nearly 0.6% on the week to 105.09, on course for its largest one-week rise since mid-April.

The dollar's ascent has kept the pressure on the yen. The Japanese currency was last at 157.04 per dollar, not far from the more than three week low of 157.19 touched on Thursday.

Japan's core inflation slowed for a second straight month in April due to milder food inflation while staying comfortably above the central bank's 2% target, government data showed on Friday.

Bank of Japan Governor Kazuo Ueda said on Thursday the economy was on track for a moderate recovery, suggesting a slump in first-quarter gross domestic product alone would not keep the central bank from raising interest rates in coming months.

Sterling was muted on Friday at $1.2690, having touched a two month high of $1.2761 on Wednesday as traders ponder rates outlook in the wake of data this week showing inflation did not slow as much as expected in April.

The start of the election campaigns of British Prime Minister Rishi Sunak and his Labour Party rival Keir Starmer, drew eyes on Thursday though analysts said the poll was unlikely to have a major effect on markets.

Orla Garvey, senior portfolio manager for fixed income at Federated Hermes, expects the Bank of England to begin its easing cycle later this year.

"The increased uncertainty around the election and budget trajectory under a potential Labour government likely puts steepening pressure on the curve."

In commodities, oil prices were steady, with Brent crude at $81.38 a barrel. U.S. West Texas Intermediate crude (WTI) futures were at $76.86.

Gold prices rose 0.24% to $2334.16 per ounce but are set for a 3.3% decline for the week, their biggest weekly drop since late September.

 - Reuters