Asian stocks are set to track US peers higher as the Federal Reserve’s cautious outlook on interest rates did little to alter Wall Street’s bets on cuts.
Futures on equity benchmarks in Australia, Japan and Hong Kong pointed to markets opening higher on Thursday. Contracts on the S&P 500 rose in early Asian trading after the US benchmark topped 5,400 for the first time in its history, with Wednesday marking the 20-month anniversary of the bull market.
US stocks and bonds posted early gains on Wednesday after a report showed the core consumer price index cooled to the slowest pace in more than three years. Later, the Fed pencilled in just one quarter point cut this year, down from three seen in March, while upping its outlook for 2025 to four cuts. Australian and New Zealand government bonds rose advanced Thursday, tracking the moves in Treasuries.
“This is a nothing-burger Fed meeting,” said David Russell at TradeStation. “They know conditions are improving, but don’t need to rush with rate cuts. The strong economy is letting Jerome Powell wring inflation out of the system without hurting jobs. Goldilocks is emerging. Policymakers don’t want to jinx it.”
In Asia, traders will be on alert for reaction to the European Union’s decision to impose additional tariffs on electric cars shipped from China starting next month. In other news, MSCI Inc. said it won’t add debt sold by the European Union to its range of government bond indexes.
Meanwhile, the Bank of Japan starts its two-day policy meeting with a decision due on Friday. While authorities are expected to keep rates on hold, they are widely seen to consider reducing bond purchases.
Fed Rate Outlook
The change in the Fed rate outlook showed up most in Treasuries and the dollar. The policy-sensitive two-year pared its yield drop by about half to eight basis points. A gauge of the greenback’s strength traded steady Thursday after falling 0.2% in its previous session. Swap contracts, however, still factored in rate reductions in November and December.
Individual Fed officials’ views on the best path forward for borrowing costs differed. The Fed’s “dot plot” showed four policymakers saw no cuts this year, while seven anticipated just one reduction and eight expected two cuts.
“These ‘dot plot’ projections likely don’t account for the latest May inflation data, which were softer than expected and reversed some of the heat we saw in the first quarter,” said Sonu Varghese at Carson Group. “We still think the odds are high for two rate cuts in 2024 if the disinflation process continues, as we expect.”
Powell said the officials welcomed the latest inflation figures, adding that he hopes for more reports like that. He said Wednesday’s figures had helped build their confidence on the trajectory of inflation but not enough to warrant rate cuts at this time.
“On net, while there was a modest surprise in this year’s median dot, we didn’t come away from this afternoon thinking much differently about the Fed,” said Michael Feroli at JPMorgan Chase & Co. “We continue to look for a first ease in November, and after this morning, perhaps see risks tilted a little more toward September than December.”
In commodities, oil rose as the risk-on sentiment spurred by cooling US inflation overshadowed an unexpected increase in the country’s crude stockpiles. Elsewhere, gold edged lower Thursday, snapping three days of gains. – Bloomberg
