By Leika Kihara

TOKYO (Reuters) -At least two of the Bank of Japan's nine board members called for an early interest rate increase at a policy meeting in June, minutes showed on Monday, underlining the central bank's hawkish tilt that provides scope for further hikes ahead.

"Members agreed that the yen's recent falls were among factors that push up inflation, and must warrant close attention in guiding monetary policy," the minutes showed.

The discussions underscore how yen moves and concerns over an inflation overshoot were key factors discussed at the BOJ's June meeting, and led to its decision in July to raise interest rates to levels unseen in 15 years.

With the Japanese currency having sharply reversed course to hit a 7-month high on Monday, markets are focusing on BOJ Deputy Governor Shinichi Uchida's speech on Wednesday for clues on the pace of future rate hikes.

The yen's latest surge has been buoyed by weak U.S. labour data, which has stoked recession worries.

"Given how latest yen rises are reducing the risk of an inflation overshoot, we expect the BOJ to hike rates at a cycle of once every six months," rather than at a more frequent pace, said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

While the BOJ kept interest rates steady at the June meeting, some board members warned that rising import costs from a weak yen were hurting consumer sentiment and heightening the risk of an inflation overshoot, the minutes showed.

One member said the BOJ must consider "adjusting the degree of monetary easing" to forestall future risks of an inflation overshoot, given how firms are renewing efforts to pass on increasing costs to consumers.

"Another member said the BOJ must continue to closely monitor relevant data in preparation for the next meeting in July and, if deemed appropriate, raise interest rates without delay," according to the minutes.

The yen, which hovered around 157 to the dollar at the time of the June meeting, hit a 38-year low below 161 in July - a move that likely affected the BOJ's decision to hike short-term rates to 0.25% from 0-0.1% at the July 30-31 meeting.

The Japanese currency stood at 145.15 on Monday.

Following the rate hike in July, BOJ Governor Kazuo Ueda did not rule out another increase this year and stressed its readiness to keep hiking borrowing costs to levels deemed neutral to the economy - seen by analysts as anywhere between 1% and 1.5%.

The outlook for private consumption likely holds the key to the next rate hike timing, some analysts say, with rising living costs hurting household sentiment.

"Some members said close attention must be paid to how much boost consumption would get from improvements in income" from wage increases, the June minutes showed.

Japan's second-quarter gross domestic product (GDP) data, due on Aug. 15, will likely show consumption rebounding after four quarters of declines, according to a Reuters poll.

cBy Wayne Cole

SYDNEY (Reuters) -Share markets tumbled and bonds rallied in Asia on Monday as fears the United States could be heading for recession sent investors rushing from risk assets while wagering interest rates will have to fall rapidly to rescue growth.

Investors began where they finished on Friday by knocking Nasdaq futures down 2.27%, while S&P 500 futures dropped 1.41%. EUROSTOXX 50 futures fell 0.6% and FTSE futures 0.2%.

Japan's Nikkei shed a staggering 5.5% to hit seven-month lows, marking its biggest three-session loss since the 2011 financial crisis.

MSCI's broadest index of Asia-Pacific shares outside Japan lost 2.0%. Chinese blue chips were a rare gainer with a rise of 0.4%, aided by a rise in the Caixin services PMI to 52.1.

Japanese 10-year bond yields fell a steep 17 basis points to the lowest since April at 0.785%, as markets radically reconsidered the prospect of another hike from the Bank of Japan.

Treasury bonds were in demand with 10-year yields hitting 3.723%, the lowest since mid-2023.

Two-year yields dropped to 3.818%, having already fallen 50 basis points last week , and could soon slide below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.

The worryingly weak July payrolls report saw markets price in a near 70% chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points. Futures imply 115 basis points of cuts in the 5.25-5.5% funds rate this year, and see rates around 3.0% by the end of 2025.

Investing.com -- Fears over the economy are set to remain to the fore amid worries that the Federal Reserve may have left interest rates elevated for too long, allowing them to hurt growth. More high-profile earnings reports are due and oil prices look set to remain volatile amid a combination of recession fears and geopolitical risks. Here's your look at what's happening in markets for the week ahead.

1.U.S. data, Fed speakers

After Friday’s weak July jobs report stoked fears over the prospect of a recession the economic calendar for the week ahead is considerably lighter.

The Institute of Supply Management releases its service sector index on Monday which is expected to point to modest growth.

Investors will get a fresh update on the state of the labor market on Thursday, with the weekly report on initial jobless claims, which are expected to pull back just slightly from an almost one-year high.

Investors will also get a chance to hear from San Francisco Fed President Mary Daly and Richmond Fed President Thomas Barkin after the central bank kept rates on hold last week, but left the door open for a September rate cut.

2. More earnings

While most of the mega cap companies have already reported some high-profile earnings results are expected in the coming days.

Results from industrial bellwether Caterpillar (NYSE:CAT) and media and entertainment giant Walt Disney (NYSE:DIS) will give more insight into the health of manufacturing and the consumer. Also reporting are healthcare heavyweights, including weight-loss drugmaker Eli Lilly (NYSE:LLY) and Super Micro Computer (NASDAQ:SMCI), which is at the center of the market's artificial intelligence excitement.

U.S.  stocks sold off for a second day on Friday, pushing the Nasdaq Composite into correction territory as indications that the economy is slowing stoked fears that the Fed has waited too long to cut rates.

Adding to the downward pressure was a drop in Amazon (NASDAQ:AMZN) and Intel (NASDAQ:INTC) after quarterly results and disappointing forecasts.

3. China outlook

Investors will get an update on how the economic recovery in China is shaping up in the second half of the year with a slew of economic releases this week.

The week begins with a private-sector survey on services activity, followed by trade data on Wednesday and a reading on consumer prices at the end of the week.

Recent data has pointed to a gloomy outlook for the world’s number two economy, and recent surprise rate cuts have reflected a growing sense of urgency in Beijing's efforts to shore up growth.

Officials will be keeping an especially close eye on Friday's inflation number for clues on how much more needs to be done to boost lackluster domestic demand.

4. Reserve Bank of Australia decision

The RBA is expected to keep interest rates on hold at its upcoming policy meeting on Tuesday after data last month showed that core inflation unexpectedly slowed to a two-year low in the second quarter and the rate of economic growth moderated in the first quarter.

Market participants will be focusing on the central banks forward guidance with markets pricing in a 70% probability of an easing in interest rates by the end of the year should inflation continue to slow.

5. Oil prices

Oil prices fell on Friday, settling at their lowest since January as weak economic data out of the U.S. and top oil importer China raised worries over the demand outlook.

The soft U.S. jobs report coupled with weakening manufacturing activity in China sent prices lower on the risk that a sluggish global economic recovery would weigh on oil consumption.

Oil investors are also watching the Middle East, where Lebanon's Iran-backed group Hezbollah said its conflict with Israel had entered a new phase.

Meanwhile, an OPEC+ meeting last Thursday left the group's oil output policy unchanged, including a plan to start unwinding one layer of production cuts from October.

--Reuters contributed to this report

By David Shepardson

WASHINGTON (Reuters) -The U.S. Commerce Department is expected to propose barring Chinese software in autonomous and connected vehicles in the coming weeks, according to sources briefed on the matter.

The Biden administration plans to issue a proposed rule that would bar Chinese software in vehicles in the United States with Level 3 automation and above, which would have the effect of also banning testing on U.S. roads of autonomous vehicles produced by Chinese companies.

The administration, in a previously unreported decision, also plans to propose barring vehicles with Chinese-developed advanced wireless communications abilities modules from U.S. roads, the sources added.

Under the proposal, automakers and suppliers would need to verify that none of their connected vehicle or advanced autonomous vehicle software was developed in a "foreign entity of concern" like China, the sources said.

The Commerce Department said last month it planned to issue proposed rules on connected vehicles in August and expected to impose limits on some software made in China and other countries deemed adversaries.

Asked for comment, a Commerce Department spokesperson said on Sunday that the department "is concerned about the national security risks associated with connected technologies in connected vehicles."

The department's Bureau of Industry and Security will issue a proposed rule that "will focus on specific systems of concern within the vehicle. Industry will also have a chance to review that proposed rule and submit comments."

The Chinese Embassy in Washington did not immediately comment but the Chinese foreign ministry has previously urged the United States "to respect the laws of the market economy and principles of fair competition." It argues Chinese cars are popular globally because they had emerged out of fierce market competition and are technologically innovative.

On Wednesday, the White House and State Department hosted a meeting with allies and industry leaders to "jointly address the national security risks associated with connected vehicles," the department said. Sources said officials disclosed details of the administration's planned rule.

The meeting included officials from the United States, Australia, Canada, the European Union, Germany, India, Japan, the Republic of Korea, Spain, and the United Kingdom who "exchanged views on the data and cybersecurity risks associated with connected vehicles and certain components."

Also known as conditional driving automation, Level 3 involves technology that allows drivers to engage in activities behind the wheel, such as watching movies or using smartphones, but only under some limited conditions.

In November, a group of U.S. lawmakers raised alarm about Chinese companies collecting and handling sensitive data while testing autonomous vehicles in the United States and asked questions of 10 major companies including Baidu (NASDAQ:BIDU), Nio (NYSE:NIO), WeRide, Didi Chuxing, Xpeng (NYSE:XPEV), Inceptio, Pony.ai, AutoX, Deeproute.ai and Qcraft.

The letters said in the 12 months ended November 2022 that Chinese AV companies test drove more than 450,000 miles in California. In July 2023, Transportation Secretary Pete Buttigieg said his department had national security concerns about Chinese autonomous vehicle companies in the United States.

The administration is worried about connected vehicles using the driver monitoring system to listen or record occupants or take control of the vehicle itself.

"The national security risks are quite significant," Commerce Secretary Gina Raimondo said in May. "We decided to take action because this is really serious stuff."

By Gayatri Suroyo and Bernadette Christina

JAKARTA (Reuters) -Indonesia's economic growth probably slowed slightly to 5% in the second quarter and authorities are monitoring geopolitical developments that could affect the domestic economy, its finance minister said on Friday.

Minister Sri Mulyani Indrawati said household consumption, investment and improving exports had likely driven growth in the April-June quarter. The figure would represent only a slight slowdown from the 5.11% annual expansion Southeast Asia's economy recorded in the first quarter.

"Going forward, we see that the increase in domestic economic activity will continue until the end of 2024," she said. "From the fiscal side, the execution of the 2024 budget, particularly on the spending side, will be focused on maintaining price stability."

For all of 2024, Indonesia's economic growth is expected to be within a range of 5% to 5.2%, she said.

The minister's second-quarter estimate is in line with a forecast in a Reuters poll of 24 economists, who pointed to moderating exports and the dampening impact of high interest rates on consumption as factors weighing on growth. The data will be released on Monday.

In a joint press conference with other officials, Sri Mulyani said financial authorities discussed geopolitical developments to anticipate risks that could affect Indonesia's economy, including tensions in the Middle East, the war in Ukraine and elections in other countries.

She said these risks, as well as global uncertainties regarding the timing of U.S. monetary easing, Washington's debt plans and Treasury yield curve, will limit capital inflows to emerging markets, including Indonesia.

Speaking at the same event, Bank Indonesia (BI) Governor Perry Warjiyo said that while low inflation created room for lower interest in recent months, the central bank could not cut rates yet because it was focusing on mitigating the spillover impact of global risks on the rupiah exchange rate.

BI had previously anticipated the U.S. Federal Reserve would cut rates in December, but its meeting this week suggested a probability of a rate cut in September, Warjiyo said.

Warjiyo has previously said BI may have room to cut rates in the fourth quarter, after global uncertainties ease

By Leika Kihara

TOKYO (Reuters) - A weak yen is hurting Japanese households' sentiment and could erode their purchasing power, the government said in a report on Friday, underscoring its concern over the negative economic impact of the currency's fall.

When former premier Shinzo Abe's administration deployed its "Abenomics" stimulus policies in 2013, rising inflation expectations helped improve household sentiment, the government said in an annual white paper analysing the economy.

But a renewed rise in inflation expectations since mid-2023 has soured households' mood, partly because the public reacted to media reports about rising food prices and the boost to import costs from a weak yen, it said.

"A weak yen risks eroding consumers' purchasing power" by pushing up inflation more than wage growth, the paper said.

After languishing at 38-lows below 160 per dollar for much of July, the yen staged a sharp rally in the days leading up to and after the Bank of Japan's decision on Wednesday to raise interest rates.

It stood at 149.07 to the dollar in Asia on Friday as investors began shifting their focus on prospects of steady rate hikes by the BOJ, which would come in the face of an expected start to the U.S. monetary easing cycle by the Federal Reserve as soon as September.

In the white paper that was prepared well before Wednesday's BOJ decision, the government said the yen's declines no longer push up export volume as much as in the past as more Japanese manufacturers shift production overseas.

Rather, a weak yen weighs on smaller firms' profits by boosting raw material import costs, the report said.

A weak yen has become a source of concern for Japanese policymakers as it has dampened consumption by inflating the cost of importing fuel, food and raw material.

Japanese authorities spent 5.53 trillion yen ($37 billion) intervening in the foreign exchange market in July to pull the yen off 38-year lows past 160 per dollar, official data showed.

The Bank of Japan also cited the risk of an inflation overshoot from a weak yen as among reasons for raising interest rates on Wednesday.

($1 = 149.5400 yen)

By Lewis Krauskopf

NEW YORK (Reuters) - Economic concerns are once again showing up on Wall Street's radar, as worries grow that months of elevated interest rates may be starting to hurt U.S. growth.

For months, investors had been heartened by cooling inflation and gradually slowing employment, believing they bolstered the case for the Fed to begin cutting interest rates.

Now that a September rate cut has come into view following a Fed meeting earlier this week, investors are worried that the central bank may have left rates at restrictive levels for too long, allowing them to take a toll on economic growth.

Evidence of such a shift in thinking came on Thursday, when data showing weakness in the labor market and manufacturing sector sparked a sharp selloff in U.S. equities, with investors dumping everything from chip stocks to industrials while piling into defensive plays. Richly valued tech stocks tumbled, extending losses in the Nasdaq Composite to nearly 8% from a record closing high reached in July.

"The narrative has been that rate cuts are just because inflation is coming closer to the target while everything else remains pretty solid," said Angelo Kourkafas, senior investment strategist at Edward Jones. "But now there are some cracks."

The concerns put a spotlight on upcoming releases - such as Friday's employment data and an inflation report later this month - that could exacerbate worries if they show further signs of weakness.

Next week brings earnings from industrial bellwether Caterpillar (NYSE:CAT) and media and entertainment giant Walt Disney (NYSE:DIS), which will give more insight into the health of the consumer and manufacturing, as well as reports from healthcare heavyweights such as weight-loss drugmaker Eli Lilly (NYSE:LLY).

Bets in the futures markets on Thursday suggested growing unease about the economy. Fed fund futures reflected traders pricing in an over 25% chance of a 50-basis point cut at the central bank’s September meeting, double the odds from a day before, according to CME FedWatch. Futures priced a total of 85 basis points in rate cuts in 2024, compared to just over 60 basis points priced in on Wednesday.

"The comfort that (the market) took yesterday in feeling that the Fed was on track for a September rate cut has switched to the reality that there is a lot of time between now and that September meeting," said Yung-Yu Ma, chief investment officer at BMO Wealth Management.

Broader markets also showed signs of unease. The Cboe Volatility index - known as Wall Street’s fear gauge - stands near a three-month high as demand for options protection against a stock market selloff rose. Worries over fresh turmoil in the Middle East also contributed to investor nervousness.

Meanwhile, investors have shown a preference for sectors such as utilities and healthcare - popular options during times of economic uncertainty.

Options data for the Health Care Select Sector SPDR Fund showed the average daily balance between put and call contracts over the last month at its most bullish in about three years, according to a Reuters analysis of Trade Alert data.

Trading in the options on Utilities Select Sector SPDR Fund also shows a pullback in defensive positioning, highlighting traders' expectations for strength for the sector.

The healthcare sector is up 4% in the past month, while utilities are up over 9%. By contrast, the Philadelphia SE Semiconductor index is down 11% in that period amid sharp losses in investor favorites such as Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO).

To be sure, some investors said the data could just be an excuse to lock in profits after the market's overall strong run in 2024.

“What you’re seeing now, and you’d probably see it for the next month or two, is some kind of consolidation and sideways price action," said Bill Strazzullo, chief market strategist at Bell Curve Trading. "The bigger picture bull trend is intact."

Investors will have more earnings reports to chew over in the weeks ahead, including Nvidia at the end of the month, while the U.S. presidential race could add to volatility.

"It’s such a fine line because you want just enough economic weakness that the Fed will have to cut rates but not so much that it becomes bad for corporate earnings," said Burns McKinney, a portfolio manager at NFJ. "The Fed has almost been like a surfer riding a wave and trying to time everything just right."

NEW YORK (Reuters) - Wall Street's most watched gauge of investor anxiety jumped to a more than three-month high on Thursday as U.S. stocks fell sharply after a round of data on Thursday spurred concerns the economy may be slowing faster than anticipated.

The Cboe Volatility Index hit 19.48, its highest since April 19, before paring gains to finish at 18.59. The jump came as the S&P 500 fell nearly 1.4%. A 2.3% drop in the tech-heavy Nasdaq Composite Index, meanwhile, brought it within two percentage points of a 10% decline from a record high reached last month.

The options-based VIX index, which has been largely subdued with an average reading of 13.96 so far this year, has perked up in recent weeks as investors have grown increasingly apprehensive about the outlook for corporate earnings and economic growth.

The concerns, which have pulled the S&P 500 Index down about 4% from its July 16 record closing high of 5,667.2, have also spurred a jump in trading in VIX options. The index is up 14% year-to-date.

On Thursday, some 1.5 million VIX options contracts changed hands, nearly twice the average daily volume for the options, according to Trade Alert data.

Thursday's jump brought the index closer to its long-term average of 19.5.

Meanwhile, the VVIX index - a gauge of expected swings in the fear index - closed up 16.93 points at 111.18, signaling investors expect sharp near-term swings in the VIX.

By Makailah Gause

NEW YORK (Reuters) - The average rate on the popular U.S. 30-year mortgage rate fell to 6.73% this week, its lowest level since February as the bond market reacted to signs of cooling inflation.

The 30-year fixed-rate mortgage was 5 basis points lower than a week earlier when it averaged 6.78%, mortgage finance giant Freddie Mac said on Thursday. It averaged 6.90% during the same period a year ago.

"Apprehension in consumer confidence may prevent an immediate uptick as affordability challenges remain top of mind," Chief Economist Sam Khater said in a statement.

But, he said, data showing a moderation in home price growth and increasing housing inventory are positive signs for prospective home buyers.

House prices increased 5.7% year-on-year in May, the smallest annual increase in 10 months as still-high mortgage rates then kept a lid on demand, the Federal Housing Finance Agency said Tuesday.

More recently, though, pending home sales surged 4.8% in June from a month earlier, helped by the recent increase in homes for sale, the National Association of Realtors said on Wednesday.

Still, even with home loan rates now more than 1 percentage point below their peak levels from last year, mortgage application volumes remain subdued.

"Many borrowers may be hoping and waiting for mortgage rates to decline even further, which is what we expect to happen once the Federal Reserve begins to cut short-term rates," Mortgage Bankers Association Chief Executive Bob Broeksmit said in a statement.

If inflation continues to cool, the Fed could cut interest rates as soon as September, Chair Jerome Powell said Wednesday.

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - Bond investors, expecting the Federal Reserve to hold interest rates steady this week but signal that rate cuts are imminent, are betting that the U.S. Treasury yield curve will become less inverted and eventually return to a normal positive slope.

The strategy involves bullish bets on short-dated Treasuries and reducing longer-dated exposure, a trade referred to as a "steepener" which pushes yields on longer-dated Treasuries higher than short-term maturities. Investors are compensated with a higher yield for taking risk over a longer period.

The widely watched two-year/10-year yield curve has been inverted for two years, the longest inversion in history, with the gap in yield at minus 22 basis points (bps).

With the focus on the yield curve, the Federal Reserve is widely anticipated on Wednesday, at the end of its two-day policy meeting, to keep its benchmark overnight rate in the 5.25%-5.50% range for an eighth straight meeting. Investors expect a "dovish hold" from Fed Chair Jerome Powell's press conference at the end of the meeting, in which he is likely to signal that rates will be lowered as soon as September for the first time in more than four years.

Powell also has the Jackson Hole gathering of central bankers in late August to prepare the market for a rate cut. By then more data on inflation and this Friday's July employment report could give policy makers the confidence they seek.

The rate futures market has priced in about 68 bps of total cuts this year starting in September, LSEG calculations showed, a big jump from 30 bps just before the June meeting. Roughly three more cuts of 25 bps each are expected by June 2025.

In the Fed's June rate forecasts the central bank had penciled in just one cut in 2024. Easing U.S. inflation and a gradually slackening labor market have prompted a shift in rate expectations.

"The yield curve moved a significant amount in the last six weeks, but we are at these levels in October last year and it still comes down to an inverted curve, which is not normal," said Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, with assets under management of $352.6 billion.

"We're going into a situation where the curve moves to a normal positive slope. There is plenty of room for it to go."

BULL STEEPENERS

The spread between two-year and 10-year yields has narrowed by 30.4 bps since late June. The curve the last few weeks has mainly seen "bull steepeners," where short-term yields have fallen more sharply than longer-dated ones, a typical prelude to the Fed's starting an easing cycle.

Investors had bet aggressively in January on a steeper yield curve, as the markets priced in multiple rate cuts for 2024 after a dovish pivot from the Fed in December.

But those bets unraveled and the curve flattened even more as short-term yields surged above long-term ones amid a surprisingly durable economy and pesky inflation.

Going into this week's Fed meeting, investors in the futures market sharply increased net long bets on short-dated Treasuries, such as U.S. two-year notes, while net long positions on longer maturities have not risen as much or have declined. That mirrored bull steepeners that have been in place the last few weeks.

Friday's data from the Commodity Futures Trading Commission showed asset managers last week increased their net long position on U.S. two year notes to a record high.

Asset managers have also remained net long on U.S. 5-year note futures, hitting an all-time peak in mid-July before slipping a bit last week,

"There is an urgency to get into the short end of the curve before yields start to fall in a more pronounced way," said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia.

Net longs from institutional investors on U.S. 10-year futures were largely flat last week.

"If the Fed starts its cutting cycle without a recession, buying any duration, or any longer bonds, won't necessarily give you the same impact of being on the right part of the curve, like the 2s to 7s," said Mike Sanders, portfolio manager and head of fixed income at Madison Investments in Madison, Wisconsin.

The firm, with $25 billion in assets, is currently overweight U.S. three-year to seven-year Treasuries, reflecting expectations their yields will fall.