Asian stocks and bonds find some relief in Fed messages

Asian stocks made cautious gains on Thursday as investors tipped the pace of U.S. rate hikes to slow, lowering bond yields and restraining the dollar.

As expected, the US Federal Reserve raised rates by 75 basis points to 2.25-2.5%, but noted some easing in recent data.

Fed Chairman Jerome Powell was suitably hawkish on the fight against inflation during his press conference, but also dropped expectations on the size of the next rate hike and noted that “at some point” it would be appropriate to slow down.

“The Fed no longer feels behind the curve and can now assess the relevance of ‘meeting-by-meeting’ policy,” said Elliot Clarke, senior economist at Westpac.

“That’s not to say the rate hike cycle is over or even a pause is coming, but the risks seem to be shifting from an uptrend to a downside.”

The futures market still has 100 basis points of additional tightening expected by the end of the year, but also implies around 50 basis points of rate cuts over 2023.

The mere hint of a less aggressive Fed was enough to push MSCI’s broadest index of Asia-Pacific stocks outside Japan up 0.5%. Japan’s Nikkei added 0.7% and South Korea 0.8%.

Yet shares of several major U.S. tech companies, including Meta Platforms, also fell after hours as poor quarterly earnings and outlook underscored recession fears.

That saw Nasdaq futures fall 0.4%, after seeing their biggest daily gain since April 2020 on Wednesday, while S&P 500 futures fell 0.2%.

Attention now turns to US gross domestic product data for the second quarter, where another negative reading would meet the technical definition of a recession, although the US has its own way of deciding that.

The median forecast is for 0.5% growth, but the closely watched Atlanta Fed GDP estimate calls for a decline of 1.2%.

In bond markets, two-year Treasury yields stabilized at 2.990% after falling 6 basis points following the Fed meeting.

Although the yield curve steepened slightly, most of it remained inverted, a sign that investors believe the policy tightening will lead to an economic slowdown and lower inflation.

“While central banks are still on track to continue tightening this year, it is increasingly likely that the fastest pace of rate hikes is behind us,” JPMorgan analysts said in a note. .

“Falling commodity prices, especially excluding European natural gas, should offer some relief from inflation, and the global economy outside of China is losing momentum.”

In currencies, the dollar index held steady at 106.360 after losing 0.7% overnight as risk sentiment improved. It dipped to 136.18 yen and moved away from its recent high of 139.38.

The euro hovered around US$1.0200, after rebounding 0.9% overnight, but faced strong resistance at US$1.0278.

The single currency still faces an energy crisis as the IMF has warned that a complete cut off of Russian gas to Europe by the end of the year could lead to virtually zero economic growth next year .

Russia delivered less gas to Europe this week and warned of further cuts to come, pushing up gas and oil prices around the world.

U.S. crude added another 54 cents to US$97.80 a barrel, after rebounding 2.4% overnight, while Brent rose 32 cents to US$106.94.

Spot gold was 0.3% firmer at US$1,738 an ounce, having benefited from the weaker dollar and bond yields.


Garland K. Long