Global Markets: Asian equities cautious as inflation dampens expectations for a rate decrease

Although investors are anticipating China markets return from vacation with a bounce in their step, Asian equities started the day slowly on Monday as hopes for early rate cuts across the world faded. The recent spike in IT stocks is expected to be put to the test on Wednesday when AI diva Nvidia releases its results. The U.S. markets were closed on Wednesday.

After rising 2% the previous week, MSCI’s broadest index of Asia-Pacific stocks outside of Japan increased by 0.2%. After rising more than 4% the previous week to come up just short of its record high, Japan’s Nikkei remained flat. Positive news came from China, where over 61 million train rides were made over the Lunar New Year holiday, resulting in a 47% increase in tourist income compared to the same period last year.

Although the country’s central bank passed up the opportunity to lower interest rates once again on Sunday, which is likely to lessen the pressure on the yuan, economists see plenty of room for more policy support since deflation is expected to worsen. The same cannot be true for the US, where markets drastically reduced pricing for rate cuts in response to strong data on producer and consumer prices.

The Federal Reserve’s preferred gauge of core personal consumption inflation, according to Bruce Kasman, global head of economics at JPMorgan, might potentially rise by 0.5% in January. The markets were aiming for a mere 0.2% increase a week ago.The risks have changed such that core inflation and labor market conditions both surprise the Fed in a hawkish way in the first half of 2024, Kasman said in a note. “While it is premature to place significant weight on noisy January data,” Kasman wrote.”This stall has been predicted to dampen expectations regarding the overall magnitude of the easing cycle ahead and postpone the start of the developed world easing cycle to midyear.”

A few weeks ago, it was thought to be a done deal, but now futures have dropped to suggest that there is only a 28% probability that rates would be lowered in May. The markets have implied fewer than 100 basis points of easing by taking out two quarter-point rate decreases for this year.

The Fed’s most recent policy meeting minutes, released this week, seem out of date due to the surprise on inflation, but any discussion on the timing of future cuts will be taken notice of. This week, several Fed speakers will be available to discuss the forecast. Of particular relevance are Governor Christopher Waller and Fed Vice Chair Philip Jefferson.