Asian investors tread cautiously on Monday as they tried to capitalize on recent stock gains, with talk revolving around how big of an expected U.S. interest rate cut this week, while sentiment was dragged down by worries about the Chinese economy .
The yen climbed to a new high since December ahead of the Federal Reserve’s decision on Wednesday and a Bank of Japan policy meeting two days later.
Data showing U.S. inflation slowed more than expected last month, to its weakest pace since February 2021, fueled fresh talk that Fed officials will announce a significant 50 basis point cut and continue to retreat in the new year.
But while bets on such a move have risen, some analysts warned it could send a message that policymakers are worried about the economy, particularly after two readings showed the labor market softening.
The US Fed is expected to announce its first rate cut since 2020
While bank officials have kept their cards close to their chests, they have hinted they are willing to discuss a bigger cut, with former New York Fed chief Bill Dudley saying he thinks “there’s a big case for 50.” .
Michael Krautzberger at AllianzGI said: “The Fed, like other central bankers, is now focused on economic growth rather than inflation risks and is increasingly concerned that it is behind the policy curve — cutting rates too slowly to prevent a recession or a larger slowdown in growth.
“Therefore, in our view, the risks of further rate cuts at subsequent meetings this year cannot be discounted, especially if labor market activity deteriorates faster than expected and inflation continues to move towards target.”
All three major indexes on Wall Street rose on Friday, with the Dow and S&P 500 within touching distance of their record highs.
Russia’s central bank raises interest rates as inflation soars
However, Asian investors were unable to extend the rally, with Hong Kong, Singapore and Wellington falling but Sydney, Taipei and Manila rising.
Trade was weakened by the holiday in Tokyo, Shanghai, Jakarta and Seoul.
In currency markets the yen hit 140.43 yen per dollar, its strongest level since late December, while gold remained at all-time highs after hitting a record high of $2,586.10 an ounce on Friday.
Traders are watching developments in China after weaker data on credit, retail sales, industrial production and house prices fueled concerns about the health of the world’s number two economy.
The data “collectively add to concerns that the policy measures announced in recent weeks and months have so far had no measurable impact on picking up economic growth so far in the third quarter after a weak performance in the second quarter,” said National Bank’s Ray Attrill of Australia.
He added that investors will be watching with interest the upcoming meeting of the government’s Politburo — the date of which has yet to be set.
Most Asian markets rose as traders braced for a Fed rate cut
In light of the latest batch of disappointing data, the central bank outlined plans to support the economy, saying it would “make the maintenance of price stability and pressure for a modest price recovery an important consideration for monetary policy and cover reasonable financing demand for consumption in a more targeted way’.
The Fed’s decision is due to be followed by the BoJ on Friday, with most analysts expecting it to keep interest rates on hold after a surprise hike in late July sent markets reeling.
“A sequential hike could likely be seen as too aggressive, especially given criticism that the BoJ’s hawkish stance contributed to global market turmoil in early August,” said IG analyst Tony Sycamore.
“That said, stronger-than-expected inflation and wage growth in Japan last month gave the BoJ confidence in a wage-price cycle that could keep inflation above 2%, paving the way for more policy tightening policy”.
Russia faces threat of stagflation as growth slows
Keys around 02:30 GMT
Hong Kong – Hang Seng Index: DOWN 0.6 percent at 17,271.92
Tokyo – Nikkei 225: Closed due to holiday
Shanghai – Composite: Closed for holidays
Dollar/yen: DOWN at 140.53 yen from 140.76 yen on Friday
EUR/USD: UP at $1.1088 from $1.1079
GBP/USD: UP at $1.3141 from $1.3125
Euro/pound: DOWN to 84.37 pence from 84.40 pence
West Texas Intermediate: UP 0.5% to $68.98 a barrel
North Sea Brent crude: UP 0.4 percent at $71.86 a barrel
New York – Dow: UP 0.7 percent at 41,393.78 (close)
London – FTSE 100: UP 0.4 per cent at 8,273.09 (close)
Source: AFP