Fed’s Rate Pause Signals Asian Market Decline
Recent U.S. economic activity data indicates that the Federal Reserve is likely to keep interest rates unchanged for most of the year, leading to an anticipated downturn in Asian stock markets mirroring the decline in U.S. equities.
Futures for indices in Australia, Japan, and Hong Kong opened with drops exceeding 1%. On Thursday, the S&P 500 experienced its largest monthly drop, with the Dow Jones Industrial Average falling 1.5%. Subsequently, U.S. futures remained stable while Treasury yields climbed, particularly in short-term bonds.
Currently, swap trades fully price in the Federal Reserve’s first rate cut of 25 basis points for December rather than November, shifting from prior expectations. This change is influenced by the fastest growth in service providers’ activities in a year and accelerated manufacturing output, complicating inflation control and justifying the Fed’s plan to maintain high rates longer.
Economists, including Henry Russell from the Australia & New Zealand Banking Group, note that a robust growth environment is favorable for central banks responsible for optimizing economic welfare. The main uncertainty for policymakers is whether inflation will continue to progress towards target levels despite strong economic performance.
Asian traders will focus on Japan’s inflation data, set to be released on Friday, amidst speculation about the Bank of Japan’s capacity for further rate hikes this year. According to Bloomberg data, Japan’s 10-year government bond yield surpassed 1% this week, with the market largely expecting a 10-basis-point hike at the July meeting. The yen traded around 157 per dollar.
Kristina Clifton, a senior analyst at the Commonwealth Bank of Australia, suggests that while Japanese inflation may ease, it is unlikely to halt speculation about further tightening by the Bank of Japan. She anticipates the next rate hike around October, which could further pressure the yen.
Persistent High Rates
Atlanta Federal Reserve Bank President Raphael Bostic reiterated the consensus among officials this week that the Fed needs to be patient with its next steps due to significant upward price pressures. The Fed’s May meeting minutes revealed a collective desire to keep rates elevated for an extended period, with many questioning whether the current policy stance is restrictive enough to lower inflation to target levels.
Chris Low of FHN Financial remarked that the minutes serve as a reminder that while further rate hikes are unlikely, the possibility remains if inflation does not behave as expected.
On Thursday, the yield on two-year U.S. Treasuries rose by 7 basis points to 4.94%, boosting the dollar.
Nvidia’s Impact and Market Outlook
Meanwhile, Nvidia Corp., the AI darling, saw its stock surge over 9% past the $1,000 mark following another impressive earnings report. JPMorgan Chase & Co.’s trading desk noted that the S&P 500 might have further upside potential as the economy steadily strengthens.
A team led by Andrew Tyler, head of U.S. Market Intelligence, stated in a report to clients, “As the AI theme continues to play out and macro assumptions hold steady, we may continue to hit new historical highs.”
Commodities and Market Sentiment
In commodities, oil prices steadied on Friday after a previous drop, as traders weighed signs of weakening physical markets ahead of the U.S. summer driving season. Meanwhile, gold prices fell for the third consecutive day following the release of U.S. economic data on Thursday.
