GLOBAL MARKETS-Asia stocks gain, bonds fall as traders consider odds of bigger Fed cut

By Kevin Buckland

TOKYO, Sept 10 (Reuters) - Asian stocks tracked Wall Street higher on Wednesday and bonds fell as traders firmed up bets that U.S. labour market softness would spur the Federal Reserve to cut rates by at least a quarter point next week.

Gold caught its breath after Tuesday's record high, while the dollar ticked higher, with two crucial days of U.S. inflation figures, starting later on Wednesday, set to provide the final data puzzle to inform the Fed's September 17 decision.

Crude oil stayed elevated after Israel's attack on Hamas leadership in Qatar. Indeed, geopolitical worries remained front and centre of investors' minds after Poland scrambled its own and NATO air defences to shoot down drones following a Russian air attack on western Ukraine.

Markets also took in stride a court ruling that temporarily blocked President Donald Trump from removing Federal Reserve Governor Lisa Cook, a case which is likely to end up before the U.S. Supreme Court.

Investors are keenly following the unprecedented legal battle as it could upend the central bank's long-held independence although there was no immediate market reaction.

In Asia, Japan's Nikkei .N225 added 0.3%, South Korea's KOSPI .KS11 jumped 1.3% and Taiwan's equity benchmark .TWII climbed 1.46%, hitting a record high.

Hong Kong's Hang Seng .HSI gained 0.5%, while mainland Chinese blue chips .CSI300 rose 0.2%.

Overnight, the S&P 500 .SPX, Nasdaq Composite .IXIC and the Dow Jones Industrial Average .DJI each ended the day at fresh all-time highs. S&P 500 futures EScv1 pointed 0.2% higher on Wednesday.

Traders see a rate cut by the Fed next Wednesday as a sure thing, and even lay 7% odds on a super-sized half-point reduction, the CME Group's FedWatch Tool show.

A week earlier, markets assigned 7% probability on the Fed holding rates steady, but another dismal monthly payroll number last week convinced investors the Fed had no cushion to wait any longer to support the economy.

The final hurdles to that view will come on Wednesday and Thursday, in the form of producer and consumer inflation readings, respectively.

"An upside inflation surprise could rock the boat slightly and lead to an unwinding of rate cut probabilities, not so much for September, but for subsequent months," said Kyle Rodda, senior financial markets analyst at Capital.com.

The rapid deterioration in U.S. economic data, particularly on jobs, "is the reason why markets are pricing in such aggressive easing from the Fed - which, incidentally, the markets appear to believe will be enough to protect the U.S. economy from a recession, judging by current risk appetite," Rodda added.

U.S. Treasury bonds - a traditional safe-haven asset - declined for a second day on Wednesday, pushing yields higher.

The 10-year Treasury yield US10YT=RR added close to 2 basis points to 4.093%, after climbing almost 3 basis points on Tuesday.

Equivalent Japanese government bond yields JP10YTN=JBTC rose 1.5 basis points to 1.575%.

The U.S. dollar held on to gains from Tuesday against major peers in the latest session. The dollar index =USD, which measures the currency against six rivals, was flat at 97.78, after starting Wednesday by pushing slightly higher.

The greenback was little changed at $1.1705 per euro EUR=EBS, and down 0.06% at 147.33 yen JPY=EBS.

The European Central Bank sets policy this Thursday, and is widely expected to keep rates unchanged.

A month ago, economists were split on the likelihood of further rate reductions by the ECB, but sentiment has shifted with recent data showing inflation holding close to the 2% target and unemployment at a record low.

The Bank of Japan announces its latest policy decision on Friday next week, and is universally expected to forgo a rate hike this time.

Reuters and Bloomberg issued conflicting reports on Tuesday in terms of tone, with Reuters suggesting the BOJ may wait longer to tighten policy, while Bloomberg suggested policymakers are eyeing a hike this year.

Investors have also been watching politics, focusing on who will take over from Shigeru Ishiba as Japan's next prime minister, and on the staying power of France's newly appointed fifth prime minister in two years.

Gold XAU= edged up 0.2% to $3,633 per ounce, a day after leaping to an unprecedented $3,673.95.

Brent crude futures LCOc1 rose 0.5% to $66.74 a barrel, while U.S. West Texas Intermediate crude futures CLc1 gained 0.6%, to $62.99 a barrel.

Prices had settled up 0.6% in the previous trading session after Israel said it had attacked Hamas leadership in Doha, which Qatar's prime minister said threatened to derail peace talks between Hamas and Israel.