By Nichola Saminather
SINGAPORE (Reuters) - Asian stocks firmed on Friday after weak U.S. data reduced the already low chance of an interest rate increase by the Federal Reserve next week, sending the Treasury yield curve surging to its steepest level in 2-1/2 months.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 percent, but was headed for a loss of 2.2 percent for the week.
Japan's Nikkei advanced 0.4 percent, but looked set for a weekly loss of 2.9 percent as worries grew that the Bank of Japan could cut interest rates more deeply into negative territory and adjust its massive asset buying at a policy review on Sept. 20-21.
Australian shares climbed 1 percent, and were on track for a weekly decline of 0.9 percent. South Korean, Chinese, Taiwanese and Hong Kong markets are closed for holidays.
U.S. August retail sales and manufacturing output fell more than expected, data on Thursday showed. The lacklustre reports prompted the Atlanta Fed to lower its third-quarter gross domestic product estimate to a 3 percent annual rate, from 3.3 percent earlier.
"Anyone still left calling for a September hike next week from the Federal Reserve must be feeling a bit hot under the collar after further signs of economic vulnerabilities," Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.
"It’s no surprise to see reasonable buying in the short- to medium-duration U.S. Treasuries, while the longer end of the curve hardly moved," he said.
The gap between five-year note yields and 30-year bond yields widened to as much as 130.10 basis points on Thursday, the steepest since June 27.
Futures traders are now pricing in a 12 percent chance of a rate increase this month, down from 15 percent on Wednesday, according to the CME Group’s FedWatch tool. Friday's consumer price inflation data is the next test for rates-focused traders.
Dwindling expectations of a rate hike helped boost U.S. stock indexes between 1 percent and 1.5 percent on Thursday.
Wall Street also benefited from a 3.4 percent jump in Apple shares, after the company said the first batch of its new iPhone 7 Plus sold out globally.
The Fed will meet on the same dates as the BOJ, which will unveil the results of a comprehensive review of its stimulus programme after failing to reach its 2 percent inflation target.
"With inflation negative, a strong yen and modest growth we expect the Bank of Japan to increase its Japanese government bond purchases by 10 trillion yen, bringing the annual amount to 90 trillion yen," Sian Fenner, lead economist at Oxford Economics, wrote in a note, adding that he does not expect a further cut in rates.
"We also look for the BoJ to announce a change to the composition of its asset purchases, with a focus on steepening the yield curve," she said.
Few Japanese companies believe the central bank's aggressive monetary stimulus will achieve its goal of spurring inflation, a Reuters poll found, with firms citing negative fallout from the programme more than positive effects.
On Thursday, the Swiss National Bank and the Bank of England held interest rates steady.
The SNB warned that significant risks remain after sticking with its ultra-loose monetary policy and currency intervention, while the BOE said it is still likely to cut interest rates to just above zero this year.
"While its minutes show the Bank of England is still willing to wait and see if further easing is needed, should the expected recession not materialise, monetary policy may need to reverse sharply to prevent inflation building," Michael Metcalfe, head of global macro strategy at State Street Global Markets, wrote in a note.
In currencies, the dollar was little changed at 102.06 yen after Thursday's 0.3 percent loss, and was heading for a 0.6 percent decline for the week.
The dollar index, which tracks the greenback against a basket of six major peers, remained steady at 95.261, and set to end the week little changed.
Oil prices pulled back on the resumption of exports from Libya and Nigeria and worries that U.S. rig counts would continue to rise. That followed gains on Thursday of as much as 2.5 percent as renewed risk appetite stemmed a two-day rout.
Brent crude slid 0.5 percent to $46.33 a barrel, extending losses for the week to 3.5 percent. U.S. crude retreated 0.6 percent to $43.66, poised to end the week down 4.8 percent.
Gold was steady after the resurgence in risk appetite pushed it down 0.7 percent on Thursday. Spot gold was last trading at $1,314.64 an ounce, down about 1 percent for the week.
(Reporting by Nichola Saminather; Editing by Shri Navaratnam and Kim Coghill)