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Market sees 7% odds of half-point Fed cut on Sept. 17

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Asian traders take cues from Wall St rise to new record

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U.S. PPI, CPI figures this week to give final clues on Fed

move

(Updates to Asia mid-morning)

By Kevin Buckland

TOKYO, Sept 10 (Reuters) - Asian stocks tracked Wall

Street higher on Wednesday and bonds fell as traders firmed up

bets that U.S. labour market softness would spur the Federal

Reserve to cut rates by at least a quarter point next week.

Gold caught its breath after Tuesday's record high, while

the dollar ticked higher, with two crucial days of U.S.

inflation figures, starting later on Wednesday, set to provide

the final data puzzle to inform the Fed's September 17 decision.

Crude oil stayed elevated after Israel's attack on Hamas

leadership in Qatar. Indeed, geopolitical worries remained front

and centre of investors' minds after Poland scrambled its own

and NATO air defences to shoot down drones following a Russian

air attack on western Ukraine.

Markets also took in stride a court ruling that temporarily

blocked President Donald Trump from removing Federal Reserve

Governor Lisa Cook, a case which is likely to end up before the

U.S. Supreme Court.

Investors are keenly following the unprecedented legal

battle as it could upend the central bank's long-held

independence although there was no immediate market reaction.

In Asia, Japan's Nikkei added 0.3%, South Korea's

KOSPI jumped 1.3% and Taiwan's equity benchmark

climbed 1.46%, hitting a record high.

Hong Kong's Hang Seng gained 0.5%, while mainland

Chinese blue chips rose 0.2%.

Overnight, the S&P 500, Nasdaq Composite and

the Dow Jones Industrial Average each ended the day at

fresh all-time highs. S&P 500 futures pointed 0.2%

higher on Wednesday.

Traders see a rate cut by the Fed next Wednesday as a sure

thing, and even lay 7% odds on a super-sized half-point

reduction, the CME Group's FedWatch Tool show.

A week earlier, markets assigned 7% probability on the Fed

holding rates steady, but another dismal monthly payroll number

last week convinced investors the Fed had no cushion to wait any

longer to support the economy.

The final hurdles to that view will come on Wednesday and

Thursday, in the form of producer and consumer inflation

readings, respectively.

"An upside inflation surprise could rock the boat slightly

and lead to an unwinding of rate cut probabilities, not so much

for September, but for subsequent months," said Kyle Rodda,

senior financial markets analyst at Capital.com.

The rapid deterioration in U.S. economic data, particularly

on jobs, "is the reason why markets are pricing in such

aggressive easing from the Fed - which, incidentally, the

markets appear to believe will be enough to protect the U.S.

economy from a recession, judging by current risk appetite,"

Rodda added.

U.S. Treasury bonds - a traditional safe-haven asset -

declined for a second day on Wednesday, pushing yields higher.

The 10-year Treasury yield added close to 2

basis points to 4.093%, after climbing almost 3 basis points on

Tuesday.

Equivalent Japanese government bond yields

rose 1.5 basis points to 1.575%.

The U.S. dollar held on to gains from Tuesday against major

peers in the latest session. The dollar index, which

measures the currency against six rivals, was flat at 97.78,

after starting Wednesday by pushing slightly higher.

The greenback was little changed at $1.1705 per euro

, and down 0.06% at 147.33 yen.

The European Central Bank sets policy this Thursday, and is

widely expected to keep rates unchanged.

A month ago, economists were split on the likelihood of

further rate reductions by the ECB, but sentiment has shifted

with recent data showing inflation holding close to the 2%

target and unemployment at a record low.

The Bank of Japan announces its latest policy decision on

Friday next week, and is universally expected to forgo a rate

hike this time.

Reuters and Bloomberg issued conflicting reports on Tuesday

in terms of tone, with Reuters suggesting the BOJ may wait

longer to tighten policy, while Bloomberg suggested policymakers

are eyeing a hike this year.

Investors have also been watching politics, focusing on who

will take over from Shigeru Ishiba as Japan's next prime

minister, and on the staying power of France's newly appointed

fifth prime minister in two years.

Gold edged up 0.2% to $3,633 per ounce, a day after

leaping to an unprecedented $3,673.95.

Brent crude futures rose 0.5% to $66.74 a barrel,

while U.S. West Texas Intermediate crude futures gained

0.6%, to $62.99 a barrel.

Prices had settled up 0.6% in the previous trading session

after Israel said it had attacked Hamas leadership in Doha,

which Qatar's prime minister said threatened to derail peace

talks between Hamas and Israel.