On Thursday, Asian stocks declined, bond yields rose, and the dollar remained close to a two-year high following the US Federal Reserve’s announcement that it would slow the pace of rate cuts in the coming year. Investors were also anticipating a policy decision from the Bank of Japan.
The Federal Reserve cut interest rates on Wednesday as anticipated, but explicit cautionary comments from Chair Jerome Powell about future rate cuts caused US stocks to drop sharply. Treasury yields surged, and traders reduced their expectations for rate cuts next year.
The Dow Jones Industrial Average dropped over 1,000 points.
Asian markets mirrored Wall Street’s reaction, with MSCI’s broadest index of Asia-Pacific shares outside Japan falling by 1 percent. Japan’s Nikkei decreased by 1.8 percent, while Australian shares declined by over 2 percent.
“I think we’re in a good place, but I think from here it’s a new phase and we’re going to be cautious about further cuts,” Powell stated during a press conference.
The US central bankers now forecast just two quarter-percentage-point rate cuts by the end of 2025. This represents a half percentage point less in easing for next year compared to their projections in September.
“The Fed’s stance was more hawkish than we expected, but today’s policy guidance aligns with our view of a prolonged pause by the Fed starting in early 2025,” stated Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.
“The most significant surprises were in the inflation projections, reinforcing the ‘higher for longer’ outlook.”
The adjustment in Fed rate cut expectations boosted the dollar index, which tracks the US currency against six major counterparts, to its highest level since November 2022 on Wednesday. It stood at 108.15 in early trading on Thursday. [FRX/]
Sterling remained steady at $1.25835 ahead of the Bank of England’s policy decision later in the day, where the central bank is expected to maintain interest rates despite signs of an economic slowdown.
The yield on benchmark US 10-year notes reached a seven-month high of 4.524 per cent on Wednesday, and was last recorded at 4.51 per cent during early Asian trading hours.
Tony Sycamore, a market analyst at IG, commented that the outcome of the Federal Reserve meeting should not have surprised investors who have been observing the recent trend of robust US inflation and activity data.
“However, it has acted as a catalyst to eliminate some of the speculative excesses that had flowed into risk assets, including stocks and Bitcoin, following the US election,” he remarked.
Bitcoin eased to $100,340 after a 5 per cent drop on Wednesday, following remarks by Fed Chair Powell that the US central bank has no intention of participating in any government effort to amass large quantities of Bitcoin.
BOJ Decision Looms
The surge in Japan’s 10-year government bond yield was driven by rising Treasury yields and the anticipated policy decision from the Bank of Japan (BOJ) later today.
The BOJ’s decision comes at a time when the yen is trading around 155 per dollar, which is on the weaker side of this year’s range of 139.58 to 161.96. This weakness is attributed to the strong dollar and a significant interest rate differential, despite recent rate cuts by the Federal Reserve.
As of Thursday, the yen was valued at 154.81 per dollar, having hit a one-month low of 154.88 earlier in the trading session. The yen has depreciated by over 8 percent against the dollar this year and is on track for its fourth consecutive year of decline.
Currently, traders are assigning just a 20 percent probability to the BOJ raising rates later today. Policymakers have kept markets in suspense, with expectations for the next rate hike shifting from December to January.
Investors will closely monitor remarks from Bank of Japan (BOJ) Governor Kazuo Ueda to assess not only the timing of the next interest rate hike but also the magnitude of rate increases anticipated for the upcoming year. Currently, traders are factoring in a total of 44 basis points in BOJ rate hikes by the end of 2025.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, noted that the recent sharp depreciation of the yen will likely increase pressure on the BOJ to implement a rate hike on Thursday.
“We maintain our forecast for a 25 basis point hike due to elevated inflation, strong business confidence, and wage growth. However, we would not be surprised if the BOJ postpones the rate hike until January. We expect the BOJ to set the stage for a rate increase in early 2025,” she stated.