Asian Shares Mostly Higher After Rally On Wall Street

As the Federal Reserve announces a rate change, traders work and watch at the New York Stock Exchange in New York, Wednesday, July 27, 2022. Stocks on Wall Street are solidly higher in afternoon trading Wednesday after the Federal Reserve raised its key interest rate by a widely expected three-quarters of a point as the central bank ratchets up its campaign to quell surging inflation. (AP Photo/Seth Wenig)
As the Federal Reserve announces a rate change, traders work and watch at the New York Stock Exchange in New York, Wednesday, July 27, 2022. Stocks on Wall Street are solidly higher in afternoon trading Wednesday after the Federal Reserve raised its key interest rate by a widely expected three-quarters of a point as the central bank ratchets up its campaign to quell surging inflation. (AP Photo/Seth Wenig)
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TOKYO (AP) — Asian shares were mostly higher on Friday following a broad rally on Wall Street, but Hong Kong’s benchmark sank more than 2%.

Investors appear to have grown more convinced that the Federal Reserve may temper its aggressive interest rate hikes aimed at taming inflation after the Commerce Department reported the U.S. economy contracted at a 0.9% annual pace in the last quarter. That followed a 1.6% year-on-year drop in the first quarter.

Investors were cautiously eyeing regional tensions over China’s stance on Taiwan after President Joe Biden and China’s Xi Jinping spoke for more than two hours on Thursday. China left no doubt it blames the U.S. for a deteriorating relationship, but the White House said call's aim was to “responsibly manage our differences and work together where our interests align.”

Hong Kong's Hang Seng index dropped 2.3% to 20,148.90 and the Shanghai Composite index declined 0.7% to 3,258.86 after China’s leaders acknowledged the struggling economy won’t hit its official 5.5% growth target this year.

The announcement after a planning meeting of the ruling Communist Party said Thursday that Beijing will try to prop up sagging consumer demand but will stick to strict anti-COVID-19 tactics that have disrupted manufacturing and trade. It underscores the high cost Xi's government is willing to incur to stop the virus in a politically sensitive year when he is widely expected to try to extend his term in power.

Japan's benchmark Nikkei 225 lost 0.3% to 27,750.17, while Australia's S&P/ASX 200 gained 0.8% to 6,947.30. South Korea's Kospi added 0.4% to 2,446.22.

Japanese government data showed factory output in June jumped 8.9% from the previous month, marking the first rise in three months. The recent easing of pandemic lockdowns in China has helped boost Japanese production.

“On the economic data front, easing China’s restrictions also drove a stronger-than-expected June output for Japan, with China’s reopening potentially having a positive knock-on impact across the region as well into the second half of the year,” said Yeap Jun Rong, market strategist at IG in Singapore.

A surge in COVID-19 infections to record levels in many parts of Japan has raised concern. But Robert Carnell, regional head of research Asia-Pacific at ING believes that Japan's second quarter GDP, or gross domestic product, will rebound marginally from the first quarter’s contraction.

On Thursday, the S&P 500 rose 1.2% to 4,072.43, while the Dow added 1% to close at 32,529.63. The Nasdaq gained 1.1% to 12,162.59. The Russell 2000 rose 1.3% to 1,873.03.

Consecutive quarters of falling GDP are an informal, though not definitive, indicator of what economists call a technical recession.

The GDP report signaled weakness across the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventories tumbled as businesses slowed their restocking of shelves, shedding 2 percentage points from GDP.

The Federal Reserve has made slowing the U.S. economy to tame the highest inflation in 40 years its goal by raising interest rates, most recently on Wednesday. The latest GDP report, along with other recent weak economic data, could be giving some investors confidence that the central bank will be able to ease up on the size of any further rate hikes.

In a research note Thursday, Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities, said “Whether or not we are in a recession will be debated by academics in the months ahead. However, today’s report unequivocally reflects a substantial weakening in economic activity, and raises the likelihood of a dovish pivot by the Fed.”

The central bank raised its key short-term interest rate by 0.75 percentage points on Wednesday, lifting it to the highest level since 2018. The move sparked a broad market rally led by technology stocks that helped give the Nasdaq its biggest gain in over two years. The major indexes are now all on pace for a weekly gain, extending Wall Street’s strong July rally.

In a busy week of corporate earnings reports investors have focused on what companies are saying about inflation and the impact rising interest rates are having on their business and customers.

Technology stocks and retailers, restaurant chains and other companies that rely on direct consumer spending helped lift the S&P 500 Thursday. Microsoft rose 2.9%, Target gained 3.1% and McDonald's added 1.8% higher.

Communication services stocks were the only laggards. Meta Platforms fell 5.2% after the social media giant said its revenue fell last quarter for the first time ever, dragged down by a drop in ad spending.

Spirit Airlines shares rose 5.6% after JetBlue said it agreed to buy the budget airline for $3.8 billion to create the nation’s fifth largest airline. A day earlier, Spirit’s attempt to merge with Frontier Airlines fell apart. Frontier Airlines vaulted 20.5%.

In energy trading, benchmark U.S. crude gained 25 cents to $97.28 a barrel in electronic trading on the New York Mercantile Exchange. It lost 84 cents to $96.42 on Thursday.

Brent crude, the international pricing standard, added 3 cents to $101.86 a barrel.

In currency trading, the U.S. dollar fell to 133.24 Japanese yen from 134.27 yen late Thursday. The euro cost $1.0220, inching up from $1.0199.

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AP Business Writer Alex Veiga contributed.

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Yuri Kageyama is on Twitter https://twitter.com/yurikageyama