Asia Stocks Rise as Fed Rate Cut Bets Intensify

SINGAPORE: In a notable shift, Asian stocks experienced a rise on Tuesday, while the dollar and U.S. Treasury yields faced downward pressure. This comes just a day before the anticipated commencement of the Federal Reserve’s easing cycle, which could potentially lead to a significant rate cut. The trading environment was somewhat subdued due to extended holidays in China and South Korea, prompting investors to concentrate on the Fed's decision expected on Wednesday. Recent trends have indicated an increasing likelihood of a 50-basis-point rate cut, which has kept the dollar hovering near its lowest level in over a year against the yen, recorded at 140.64.

The dollar's decline below the 140-yen mark in the previous session has raised concerns regarding the earnings of Japanese exporters, contributing to a 2% drop in Tokyo’s Nikkei index as the market resumed trading after a national holiday. In contrast, MSCI’s broadest index of Asia-Pacific shares saw an increase of 0.47%, with Hong Kong’s Hang Seng Index advancing by 1.44%. Meanwhile, S&P 500 futures and Nasdaq futures experienced slight declines, while EUROSTOXX 50 futures and FTSE futures gained 0.33% and 0.57%, respectively.

Market analysts are currently pricing in a 67% probability that the Federal Reserve may opt for a half-percentage-point rate cut during its monetary policy meeting on Wednesday. This speculation has been fueled by a series of media reports suggesting a more aggressive easing approach. Neil Shearing, the group chief economist at Capital Economics, stated, “The case for a 50bps rate cut this week hinges in part on the idea that rates are well above most estimates of neutral.” He further emphasized that if officials believe maintaining restrictive policies for too long poses unnecessary risks to the economy, it would be illogical to delay action.

However, Shearing also pointed out that achieving a large rate cut at the beginning of the easing cycle presents a significant challenge. He noted, “If nothing else, it creates the impression that central bankers have made a mistake and fallen behind the curve.” For the year, markets have factored in approximately 120 basis points of easing by December. The two-year U.S. Treasury yield, which typically reflects short-term rate expectations, was last recorded at 3.5547%, having previously dipped to a two-year low of 3.5280%.

This week, both the Bank of England (BoE) and the Bank of Japan (BOJ) are also scheduled to meet to discuss their monetary policies, with expectations that both central banks will maintain their current rates. The anticipation of less aggressive easing by the BoE, in contrast to the Fed, has provided some support for the British pound, which was last seen 0.1% lower at $1.3202, remaining close to August’s peak of $1.3269, its strongest level since March 2022. Economists at ANZ forecast that the BoE will keep the bank rate unchanged at 5.0% during its September policy meeting, suggesting a gradual approach in the early stages of its easing cycle.

In the broader Asian context, China’s sluggish economic recovery continues to dampen market sentiment. Recent data revealed that the country’s industrial output growth slowed to a five-month low in August, with retail sales and new home prices also showing signs of weakness. Nevertheless, concerns regarding declining Chinese demand for oil were overshadowed by the ongoing effects of Hurricane Francine on output in the U.S. Gulf of Mexico, leading to a rise in oil prices on Tuesday. Brent crude futures increased by 0.44% to $73.07 a barrel, while U.S. crude futures rose by 0.67% to $70.56 per barrel.

As the global financial landscape continues to evolve, investors remain vigilant, closely monitoring the Federal Reserve's upcoming decisions and their potential implications. The interplay between economic indicators and central bank policies will undoubtedly shape market dynamics in the coming weeks, making it essential for stakeholders to stay informed and prepared for any shifts in the economic environment.