EMERGING MARKETS-Asian currencies surge on bets Fed will scale back rate hikes

* Philippine peso set for best day since May 2016 * Indonesia 10-year bond yield hits 7-week low * Markets in Thailand closed for a local holiday By Harish Sridharan July 29 (Reuters) - Currencies and bonds in Asia's emerging markets were set to finish the week on a strong note, after data showing the U.S. economy shrank for a second straight quarter raised bets that the Federal Reserve might slow the pace of rate hikes. The Philippine peso strengthened as much as 1.1%, and was on track for its best session since May 2016 against a weaker dollar. The Indonesian rupiah hit a month high and was poised for its biggest weekly jump since November, 2020. The yield on Indonesia's benchmark 10-year bond fell a further 12.8 basis points (bps) to 7.182%, hitting its lowest level since early June. The U.S. economy unexpectedly contracted in the second quarter, raising the risk that the economy is on the cusp of a recession. Money markets are currently give 76% odds that the Fed will slow the pace of rate hikes to half a point at the next meeting in September, against a 14% probability for a third consecutive 75 bps increase. Earlier this week, the Fed hiked rates by a widely expected 75 bps. But even as the U.S. pushes ahead with its steepest interest rate hikes in a generation, investors are unusually poised to buy in Asia's emerging markets, betting authorities can tame inflation without triggering the capital-flight chaos of previous cycles. Asian markets have seen substantial bond and equity outflows this year, with a surge in the U.S. yields and greenback making riskier assets less attractive. "Asia FX is likely to gain some respite in the near term, as easing global headwinds could trigger an unwind of specific USD longs," analysts at Barclays said in a client note. But with markets still unsure of the next steps from the U.S. Fed, more clarity is needed before Asian currencies see a lasting respite. Stocks in the region also posted gains. Equities in Jakarta , Mumbai and Taipei were up between 0.4% and 1.1%. Meanwhile, Chinese leader Xi Jinping warned against playing with fire over Taiwan in a call with U.S. President Joe Biden, highlighting Beijing's concerns about a possible visit to the Chinese-claimed island by U.S. House Speaker Nancy Pelosi. In South Korea, vice finance minister Bang Ki-sun said consumer prices are expected to rise in the range of 6% in July for a second month, pushed up by farm products amid unfavourable weather conditions. The won was down 0.2%. Markets in Thailand were closed for a local holiday. HIGHLIGHTS ** Malaysia's 10-year bond yield falls to 3.941% - nearly four month low ** S.Korea June industrial output up 1.4% year-on-year, compared to Reuters Poll of a 2.0% jump - Stats Office ** Singapore Q2 Prelim Unemployment Rate up 2.1% Asia stock indexes and currencies at 0438 GMT COUNTRY FX RIC FX FX YTD INDEX STOCK STOCKS DAILY % S YTD % % DAILY % Japan +0.71 -13.69 -0.26 -3.64 China +0.05 -5.76 -0.72 -10.47 India +0.46 -6.37 1.22 -1.26 Indonesia +0.47 -4.10 0.40 6.13 Malaysia +0.11 -6.34 0.22 -4.66 Philippines +1.16 -7.54 -1.08 -11.41 S.Korea -0.15 -8.42 0.42 -17.87 Singapore +0.11 -2.13 -0.50 2.59 Taiwan -0.06 -7.53 0.35 -17.98 Thailand - -8.89 - -4.90 (Reporting by Harish Sridharan in Bengaluru; Editing by Kim Coghill)