Oil jumps on US, UK strikes in Yemen, shares cautious

Asian shares were cautious on Friday as the escalating conflict in the Red Sea region sent oil prices surging, while slightly higher-than-expected US inflation data did not dent investors' views on early and aggressive rate cuts in the US and Europe.

The rally in rates may have been helped by dovish comments from European Central Bank (ECB) President Christine Lagarde who said rate cuts would occur if the central bank has certainty that inflation had fallen to the 2% level.

Oil climbed after the United States and Britain said they have started carrying out strikes against targets linked to Houthis in Yemen, after the Iran-backed group attacked international ships in the Red Sea. Brent LCOc1 futures jumped 2.2% to $79.11 a barrel, while US West Texas Intermediate (WTI) crude CLc1 rose 2.3% to $73.69.

The intensifying conflict in the Red Sea has kept shares subdued. MSCI's broadest index of Asia-Pacific shares outside Japan edged 0.2% higher, and Japan's Nikkei gained 1.1% to another 34-year high, boosted by a weak yen.

Chinese inflation data showed the country's economic recovery remained weak in December, with the consumer price index falling 0.3% from a year ago. However, separate trade data showed exports rose at a faster than expected clip last month while imports returned to growth.

Chinese shares wavered between losses and gains. Both China's blue chips and Hong Kong's Hang Seng index were last down 0.1%.

Overnight, Wall Street reversed earlier declines and was mostly flat on the day after data showed US consumer prices rose more than expected in December, with a closely watched core measure coming in slightly above consensus.

Andrew Lilley, chief rates strategist at Barrenjoey, said that even though the core US inflation data came in a little stronger than expected, it does not suggest a strong read on PCE, which is the Fed's preferred gauge of inflation.

"Additionally to that, the Fed speakers that we had last night all sounded incrementally more dovish than they had previously and ... we didn't hear such a strong pushback on the idea of a March cut from everybody who spoke," he added.

Fed officials took few fresh signals from the inflation data, with Richmond Fed President Thomas Barkin saying it did little to clarify the path of inflation.

Chicago Fed President Austan Goolsbee said he was not sure if the data indicated enough progress for the Fed to start cutting rates, while Cleveland Fed President Loretta Mester said a March rate cut was "too early in my estimation".

Still futures 0#FF: added to the bets on an interest rate cut in March at a 73% probability, compared with 68% a day earlier. They are also pricing in around 150 basis points (bps) of easing this year, compared with the Federal Reserve's dot plot of 75 bps.

"Lagarde has also similarly been pushing back against the (rate cut) idea ... So as soon as Lagarde changes her tune, and last night she did change her tune, the market is starting to move the timing of those cuts forward," said Lilley.

Euribor money market futures FEI: added as much as 10 basis points overnight. Swaps have moved to fully price in a quarter-point rate cut in April, with a 30% chance of an outsized 50 bps cut, while a total of 148 bps in easing has been priced in for this year.

Treasuries were steady in Asia after the rally, led by the short end of the curve. The two-year yield was at 4.2618% in Asia, having fallen 11 bps points overnight, while the 10 year was little changed at 3.9715%, after easing 5 bps overnight.

In the foreign exchange market, the dollar failed to make any headway from the slightly firmer-than-expected US inflation data. The dollar index was little changed at 102.19 against its major peers, after ending the previous session slightly lower.