Asian stocks nudged higher on Tuesday ahead of the influential U.S. inflation report, while Japanese shares fell and the yen firmed on rising expectations that the Bank of Japan may be ready to exit ultra easy-monetary policy as early as next week.

Gold was hovering just below its record peak touched last week and the dollar was broadly steady as traders looked for the U.S. consumer price index report later in the day to gauge when the Federal Reserve will likely start its rate cutting cycle.

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.20% higher, just shy of the seven-month high it touched on Friday. China stocks rose, with Hong Kong’s Hang Seng Index up 0.75% led by tech stocks, while the blue-chip CSI300 index 0.13% higher.

Japan’s Nikkei extended its decline and was down 0.84%, with the BOJ refraining from purchasing Japanese exchange-traded funds on Monday even as local shares dropped sharply, adding to speculation that a shift away from ultra-loose monetary policy is right around the corner.

A growing number of BOJ policymakers are warming to the idea of ending negative interest rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations, four sources familiar with the central bank’s thinking told Reuters last week. The BOJ is due to meet next week.

The changing expectations helped the yen strengthen over the past week, with the Asian currency last at 147.26 per dollar. Bank of Japan Governor Kazuo Ueda said on Tuesday the economy is recovering moderately, but said there were some weakness seen in recent data, putting yen under pressure on the day. Futures now imply a 50% chance the BOJ will shift rates to zero at its meeting on March 18-19, though some still think it might wait until its April 26 meeting.

“The question for investors is whether the BOJ will stop to ending negative rates, or start a tightening cycle. We think the former,” Frank Benzimra, head of Asia equity strategy at SocGen told the Reuters Global Markets Forum.

INFLATION WATCH

Investor attention is zeroed in on U.S. inflation data due later on Tuesday, with expectations for a monthly increase of 0.4% and 3.1% on an annual basis. Core inflation is seen rising 0.3%, which would nudge the annual pace down to 3.7%.

Vasu Menon, managing director of investment strategy at OCBC Bank in Singapore, said if the data come in higher-than-expected, this could worry investors, but such concerns may be short-lived.

“Markets have come to realise that the path ahead for inflation will be uneven, and higher-than-expected data for one or two months may not alter the medium-term outlook for inflation which is in a broad downtrend.”

Menon expects the Fed to begin rate cuts in June 2024 and go on to cut rates again in September and December.

Market are all but certain that the U.S. central bank will not cut rates when it meets next week but have priced in more than a 70% chance of a rate cut in June, CME FedWatch Tool showed.

A stronger majority of economists in the latest Reuters poll also expect the Fed to start cutting rates in June. The survey showed respondents saw it more likely that if Fed policymakers changed their rate projections at the March meeting, the median view would signal fewer cuts this year, not more.

The yield on 10-year Treasury notes was steady at 4.100%, while the dollar index, which measures the U.S. currency against six rivals, was little changed at 102.79, having hit a roughly two-month low of 102.33 last week. [FRX/]

Spot gold was last at $2,182.31 an ounce, just below the record high of $2,194.99 it touched last week. [GOL/]

U.S. crude rose 0.28% to $78.15 per barrel and Brent was at $82.48, up 0.33% on the day.