Asian stocks extend drop after cool China price data

By Lisa Twaronite

TOKYO (Reuters) - Asian stocks extended losses to a one-week low on Wednesday after China's consumer inflation cooled slightly more than expected in June, pointing to lingering weakness in the economy.

MSCI's broadest index of Asia-Pacific shares outside Japan was down about 0.7 percent, touching its lowest point since July 2 and pulling away from this week's three-year highs. Japan's Nikkei stock average .N225 dropped about 0.4 percent.

China's consumer price index (CPI) rose 2.3 percent in June from a year earlier, shy of the consensus forecast of 2.4 percent.

"The weaker CPI reading suggests inflation pressure is muted. It provides further room for policy easing in the future on the one hand, and also signals the weak demand from the domestic economy on the other hand," said Wang Jun, economist at the China Centre for International Economic Exchanges in Beijing.

Wall Street gloom also extended into Asia, after major U.S. stock indexes sagged as investors turned cautious before the start of earnings season. The Standard & Poor's 500 index shed 0.7 percent.

Upbeat employment data for June released last week had prompted some Wall Street economists to predict the U.S. Federal Reserve would raise interest rates earlier than some previously thought.

But Minneapolis Fed Reserve President Narayana Kocherlakota quashed those nascent expectations, saying the labour market still has a long way to go before the Fed reaches its goals.

"Unlike other central banks who have recently expressed their desire to become more active, the Fed remains comfortable with their current course and has no desire to alter (the) market's expectations," Kathy Lien, managing director of FX strategy at BK Asset Management, said in a note to clients.

The benchmark 10-year Treasuries yield stood at 2.573 in Asia, pulling off earlier lows, but still not far from Tuesday's U.S. close of 2.565 percent.

Later on Wednesday, the Fed will release minutes of its latest policy meeting, and ECB officials including President Mario Draghi are scheduled to speak.

Downbeat German economic data on Tuesday increased the appeal of relatively higher-yielding Treasuries, as it gave investors reason to believe that the European Central Bank could take further easing steps to support the euro zone economy.

Germany posted larger-than-forecast falls in exports and imports in May, suggesting Europe's largest economy is showing signs of weakness.

The euro was steady in Asian trade at $1.3611.

Against the yen, the greenback clawed its way to a slight gain on the day, but first touched a fresh one-week low of 101.44 yen. It last stood at 101.62, up about 0.1 percent, which helped push the dollar index stabilize to 80.185.

In commodities trading, U.S. oil inched up about 0.1 percent to $103.48 per barrel after slipping for eight straight sessions as global supply fears eased.

Gold rose slightly on the day to $1,320.70 an ounce as markets awaited the Fed minutes to gauge the U.S. central bank's outlook for interest rates.

(Additional reporting by Aileen Wang in Beijing; Editing by Kim Coghill and Eric Meijer)