Asia weathers Fed fallout, bonds still banking on rate cuts

A passerby walks past an electric monitor displaying various countries’ stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File photo

SYDNEY  -Asian shares steadied on Thursday as Chinese stocks eked out rare gains, while investors stuck to bets for sizable cuts in U.S. interest rates this year even if the kick off might now be a little later than first hoped.

The Federal Reserve committee’s decision to hold rates at 5.25-5.5 percent on Wednesday was no surprise, but it emphasized that rates would not be cut until it had more confidence that inflation was truly beaten.

In a media conference, Fed Chair Jerome Powell flatly stated a cut as early as March seemed unlikely, but also conceded that everyone on the committee was looking to ease this year.

READ: US Fed holds key rate steady as Powell says March cut unlikely

“One of the more dovish aspects of Powell’s remarks was the asymmetry on employment: strong employment gains won’t necessarily forestall rate cuts, but weak employment gains would ‘absolutely’ hasten rate cuts,” wrote analysts at JPMorgan.

“We are sticking with our call for a first cut in June, but after Powell’s remarks it’s not hard to see a configuration of employment and inflation data that gets the Committee cutting by May.”

Markets bet on May cut

Indeed, markets actually doubled down on a May move, pricing in 32 basis points of cuts – implying a 100-percent probability of 25 basis points and some chance of a 50 basis-point easing.

“We have pushed back our forecast of the first cut from March to May,” said analysts at Goldman Sachs. “However, we continue to expect five cuts in 2024 and three more in 2025 because we expect core inflation to fall at least a couple of tenths below the FOMC’s median projection this year.”

Investors also seemed to be wagering that more the Fed delayed now, the more aggressive it would have to cut in the future given slowing inflation would sharply lift real rates.

As a result, Fed fund futures for December have priced in a further 11 basis points of easing this year taking the total expected to 141 basis points.

READ: Investors temper US rate cut bets as Fed meeting looms

Likewise, Treasuries rallied strongly as 10-year yields dived 12 basis points to 3.91 percent in the wake of the Fed decision. Some of those gains were then pared in Asia, nudging yields up to 3.942 percent.

The rush into bonds was further encouraged by renewed jitters over regional U.S. banks when New York Community Bancorp crashed 37% to the lowest in over two decades after posting a surprise loss.

Bank jitters

That spilled over into other bank stocks and contributed to a sharp pullback in the S&P 500 late Wednesday, while the Nasdaq had already been pressured by falls in Alphabet Inc and Tesla.

By Thursday, sentiment had steadied and S&P 500 futures added 0.2 percent, while Nasdaq futures firmed 0.4 percent. Markets face a major test later in the day with results out from Apple, Amazon and Meta.

EUROSTOXX 50 futures were flat, while FTSE futures slipped 0.3. percent

The choppy trading left Asian markets cautious and MSCI’s broadest index of Asia-Pacific shares outside Japan inched up 0.1 percent.

Sentiment was helped by a 0.4 percent bounce in Chinese blue chip, along with some better surveys on home prices and manufacturing.

READ: Hedge funds lap up China stocks at fastest pace in five year

Japan’s Nikkei eased 0.8 percent as the yen gained. South Korea bounced 1.7 percent following upbeat trade data and a survey showing factory activity grew for the first time in 19 months.

Currency markets were jolted by the mixed reaction to the Fed, with the dollar gaining on the euro but losing to the yen as bond yields slid.

The euro was left at $1.0805, after ending Wednesday down a slight 0.2 percent. The dollar was holding at 146.81 yen, having fallen as far as 146.00 at one stage overnight.

Gold also gyrated in the wake of the Fed, and was last up 0.4 percent at $2,044 an ounce.

Oil prices pared some of the sharp losses suffered on Wednesday, as tensions in the Middle East helped offset concerns about oversupply and soft global demand.

Brent futures edged up 27 cents to $80.82 a barrel, while U.S. crude rose 27 cents to $76.12 per barrel.