(Bloomberg) — Asian equities are bracing for a retreat from the Federal Reserve’s half-point rate cut and signs of further policy easing next month.
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Japanese equity futures rose, while contracts for the U.S. benchmark also rose, to pare Wednesday’s losses. The S&P 500 initially touched a record high before closing 0.3% lower, while the Nasdaq fell 0.5%. Australian equity futures edged lower as Hong Kong markets resumed post-holiday trading.
The Fed’s first cuts in more than four years were accompanied by projections showing a narrow majority in favor of an additional 50 basis points of cuts at the two remaining policy meetings this year. The market is pricing in a more aggressive 70 basis point reduction. Fed Chairman Jerome Powell warned against assuming rate cuts will continue.
The dollar’s strength index reduced the gains from the previous session early Thursday, while it has decreased to trade at around 142 per greenback. The 10-year Treasury yielded six basis points to 3.7% on Wednesday with Australian and New Zealand bonds tracking the move in early trade.
“The rate cut is the first step in a difficult task for the Fed to manage the landing of the economy,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “Traders will continue to weigh how deeply the Fed will cut rates, putting downward pressure on the dollar-yen due to the US interest rate cut. That said, Japanese stocks are set to rise today after the yen weakened overnight after all.”
In the US, equities, especially economically sensitive companies, rose sharply on Wednesday, driving the S&P 500 up 1%. From stocks to Treasuries, corporate bonds to commodities, every major asset fell on Wednesday. While the scale of the decline is modest, such a pullback does not follow the Fed’s policy decisions from June 2021.
Gold retreated from record highs while oil fell as signs of weak demand outweighed rising tensions in the Middle East.
“Although the Fed usually avoids admitting policy mistakes, it appears that the larger-than-expected initial rate cut reflects an effort to correct the lag in previous decisions,” said Manish Bhargava, chief executive at Straits Investment Management. “With today’s actions, the Fed is taking preemptive steps to increase the likelihood of achieving a soft landing, balancing two mandates in an increasingly uncertain economic environment.”
In Asia, Hong Kong’s Monetary Authority cut its key interest rate for the first time since 2020 following Fed cuts, while New Zealand’s economy shrank in the second quarter. Data to be released in the region include unemployment for Australia and Hong Kong, trade figures for Malaysia and interest rate decisions in Taiwan.
Elsewhere, the Bank of England may not cut rates for the second meeting in a row.
When considering the market’s reaction to the half-point cut coming to the meeting, some expect the reaction to be positive due to the benefits to the economy, some expect a drop due to the logic of ‘what they know we don’t know’. , according to Mark Hackett at Nationwide.
“Less than a directional move is the most unlikely outcome, but that’s what we got,” Hackett said. “The S&P 500 is having a tough time breaking through record highs in July, and the more breakouts that fail, the harder it will be.”
Treasuries, set for a fifth straight month in September, fell after the Fed’s decision and Powell’s comments. Officials’ updated quarterly forecasts show the average projection is for the funding rate to fall by the end of the year to 4.375% – representing half a point more than this year’s total reduction. At the end of 2025 and 2026, the average forecast is 3.375% and 2.875%.
“Now it’s going to be a battle between market expectations and the Fed, with the employment data — not the inflation data — determining which side is right,” said Jack McIntyre at Brandywine Global. “Now, everyone is back to data dependency.”
This week’s highlights:
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UK rate decision, there
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Conf. US Key housing index, initial jobless claims, existing home sales, Thursday
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FedEx earnings, Friday
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Japan rate decision, there
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Eurozone consumer confidence, there
Some of the main movements in the market:
Savings
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S&P 500 futures were up 0.3% at 8:34 am Tokyo time
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Hang Seng futures are unchanged
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S&P/ASX 200 futures down 0.5%
currency
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.1111
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The Japanese yen fell 0.3% to 142.71 per dollar
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The offshore yuan was little changed at 7.0956 per dollar
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The Australian dollar fell 0.1% to $0.6757
Cryptocurrencies
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Bitcoin rose 1.7% to $61,246.78
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Ether rose 1.3% to $2,354.98
Bond
Commodity
This story was produced with the help of Bloomberg Automation.
–With help from Winnie Hsu and Yasutaka Tamura.
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