SINGAPORE, Dec 12 (Reuters) - Asian shares rose on Tuesday while the dollar drifted lower as investors stayed cautious ahead of a crucial U.S. inflation report later in the day that will set the tone for a week filled with central bank meetings.
The U.S. Federal Reserve is widely expected to hold rates on Wednesday, with the spotlight squarely on comments from Chair Jerome Powell during his press conference as well as the central bank's dot plot and economic projections.
Before that, the U.S. Labor Department's Consumer Price Index (CPI) report later on Tuesday is expected to show inflation still cooling but staying well above the Fed's 2% annual target, with core CPI expected to come in at 4%.
That has meant investors are hesitant in placing major bets, with futures indicating European stock markets are set for a muted open. Eurostoxx 50 futures was up 0.11%, German DAX futures 0.17% higher and FTSE futures up 0.06%.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.54%.
"I think a soft landing is now firmly priced into markets and quickly becoming the consensus outlook for 2024," said Ben Bennett, APAC investment strategist for Legal and General Investment Management (LGIM).
"So if the data strays far from that path, there could be some disappointment."
A slew of economic data along with comments from Fed officials stoked expectations at the start of the month that the Fed would start cutting rates early next year, but investors have since dialled back some of those expectations.
Markets are now pricing in a 48% chance of a rate cut in March compared with 57% a week earlier, according to CME FedWatch tool. Markets, though, have priced in a 75% chance of a cut in May.
Financial conditions have loosened since the last Fed meeting at the start of November and that will likely weigh on the central bank's thinking, analysts say.
"The Fed will feel that it cannot afford to have financial conditions ease further, as that could potentially re-accelerate labour demand and put renewed upward pressure on the rate of consumer inflation," said Erik Weisman, chief economist and portfolio manager at MFS Investment Management.
"Whether the market takes the hint remains to be seen and will likely be driven by the unfolding macro data more than Fed jawboning."
In a busy week for central bankers, the European Central Bank, Bank of England, Norges Bank and the Swiss National Bank all meet on Thursday.
In Asia, China's blue-chip stocks eased 0.11%, while Hong Kong's Hang Seng index rose 0.60% as investors looked for signs of policy support after data showed China's November consumer prices posted their fastest fall in three years.
The yield on 10-year Treasury notes fell 3.1 basis points to 4.208% after a lacklustre three- and 10-year note auctions on Monday.
Investors were reluctant to buy Treasuries in the auctions given thinner liquidity with the inflation data and the Fed meeting on the horizon this week.
The Treasury Department will sell $21 billion in 30-year reopened bonds on Tuesday, following Monday's auction of $50 billion in reopened three-year notes and $37 billion in 10-year notes.
In currency markets, the Japanese yen remained in the spotlight as expectations that the Bank of Japan was ready to walk away from its ultra loose monetary policy faded after Bloomberg reported on Monday, citing sources, that BOJ officials see little need to rush out of negative rates.
The yen strengthened 0.54% to 145.39 per dollar, recouping some of the steep overnight losses. The BOJ is due to meet next week.
The dollar index, which measures the U.S. currency against six rivals including yen, fell 0.135% to 103.92.
Gold prices edged higher after touching a three-week low in the previous session and were last at $1,987.49 an ounce.
U.S. crude rose 0.7% to $71.82 per barrel and Brent was at $76.51, up 0.63% on the day.
(Reporting by Ankur Banerjee; Editing by Lincoln Feast and Kim Coghill)
