Asian shares subdued ahead of US payrolls test; Trump's tax bill in focus

By Stella Qiu

SYDNEY (Reuters) -Asian shares were subdued on Thursday as investors braced for a key U.S. jobs report that may justify imminent rate cuts by the Federal Reserve and waited on the passage of a massive U.S. tax and spending bill in Congress.

Wall Street climbed overnight to close at new record highs after President Donald Trump announced that the U.S. has struck a trade deal with Vietnam, including a 20% tariff on exports to the U.S. That is lower than the 46% tariff that had been threatened, but still much higher than previous rates.

Vietnamese shares gained 0.5% to the highest since April 2022. The local dong currency, however, dipped to a record low of 26,229 per dollar.

"More trade deals may soon be announced but the 20% tariff agreed with Vietnam does not augur well, and that or even higher could become the norm for some including Europe and Japan," said Shane Oliver, chief economist at AMP.

Indeed, Japan has invoked national interests as talks with the U.S. struggled, while South Korea President Lee Jae Myung said on Thursday U.S. tariff negotiations were looking difficult and he cannot say if talks can conclude by next Tuesday.

MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.1% on Thursday, while Japan's Nikkei slipped 0.1%.

China's blue chips rose 0.5%, while Hong Kong's Hang Seng index fell 1%. Data also showed China's services activity expanded at the slowest pace in nine months in June.

Both Nasdaq futures and S&P 500 futures were 0.1% higher in Asia, while EUROSTOXX 50 futures were up 0.2%. [.N]

Investors were waiting for Trump's massive tax and spending bill to pass the Congress. However, Republicans in the House of Representatives are struggling to unite to support the bill.

The bill is expected to add $3.3 trillion to the national debt, slash taxes and reduce social safety net programs.

JOBS RISK

The main risk event for markets will be the U.S. payrolls figures due later in the day. Analysts are forecasting a rise of 110,000 in June with the jobless rate ticking up to 4.3% but the stakes are high after a private sector payrolls report surprised with the first fall in over two years.

The resilience of the labour market is a major reason the majority of Federal Reserve members say they can afford to hold off on cutting rates until they can gauge the real impact of tariffs on inflation.

"These labour market indicators warn of the risk that the unemployment rate could spike to 4.4%, the highest since October 2021," said Tony Sycamore, analyst at IG.

"This would quickly increase the probability of a July Fed rate cut to around 70%."

Futures imply just a 25% probability for a rate cut this month from the Fed, which has not eased policy at all this year, drawing the ire of Trump who reiterated his call on Wednesday for Chair Jerome Powell to resign.

Trump, who said rates should be cut to 1% from the current Fed benchmark rate of 4.25% to 4.50%, has repeatedly railed against Powell for not lowering borrowing costs since his return to the White House in January.

A UBS survey on Thursday showed two in three reserve managers fear Fed independence is at risk and nearly half think the rule of law in the U.S. may deteriorate enough to influence their asset allocation significantly.

The Treasuries market was tense before the data as a weak jobs report would send yields sharply lower. Ten-year Treasury bond yield slipped 3 basis points to 4.265% on Thursday, while two-year yields eased 2 bps to 3.772%.

The dollar is hovering just above a three-year low against its major peers at 96.872, up 0.1% for the day. Sterling slipped 0.1% to $1.3626, on top of a steep 0.8% fall overnight, as fears about the future of its finance minister Rachel Reeves eased.

Investor anxiety over UK finances after the British government's reversal on welfare reforms caused gilt yields to jump overnight, up nearly 23 basis points at one point, the most since October 2022.

In commodities markets, oil prices were lower after jumping 3% overnight as Iran suspended cooperation with the U.N. nuclear watchdog. U.S. crude futures slipped 0.7% to $66.93 a barrel while Brent was at $68.56 per barrel, 0.8% lower on the day.

Gold prices eased 0.1% to $3,352 an ounce.

(Reporting by Stella Qiu; Editing by Lincoln Feast.)