Asian stocks mostly dropped on reduced expectations for a swift Federal Reserve pivot to monetary easing. Chinese shares bucked the trend after authorities intensified rescue efforts.
Equities in Japan, Australia and South Korea fell, while benchmarks in Hong Kong and mainland China rose more than 1%. US equity futures were steady after the S&P 500 dropped 0.3% and the Nasdaq 100 shed 0.2% on Monday.
The latest gains in Chinese shares came after Beijing rolled out more measures to stem a stock rout, such as tightening trading restrictions on domestic institutional investors as well as some offshore units. News that the nation’s sovereign wealth fund has and will continue to expand its holdings of exchange-traded funds also lifted investor mood.
“Right now the market is looking for clearer signals on the economic recovery,” Marcella Chow, global market strategist for JPMorgan Asset Management, said on Bloomberg Television regarding China. “Expectations remain quite low — markets and investors are still grappling with the weak economic recovery.”
The 10-year Treasury yield fell around three basis points in early Asian trading. That followed another bout of heavy selling on Monday, spurred by strong US economic data, that pushed the rate up by 14 basis points, marking the biggest two-day jump since June 2022.
The Treasuries selloff on Monday came after the Institute for Supply Management’s services gauge hit a four-month high while prices picked up. The news jolted trading when investors were already digesting cautious views from some Fed speakers including Jerome Powell.
The net effect is a stronger economy that gives the central bank longer to reduce rates. Fed swaps almost wiped out the odds of a March rate move, and the chances of a May cut have also been reduced.
The “one-two punch” prevented market players from achieving further upside, according to Jose Torres at Interactive Brokers. JPMorgan Chase & Co. strategist Marko Kolanovic said that “absent a material shock, we think this year’s easing will prove more moderate than markets have priced.”
Australian and New Zealand yields were moderately higher. The Reserve Bank of Australia will release updated forecasts at its first policy meeting of the year on Tuesday, with economists unanimously expecting the cash rate will be kept at 4.35%. Authorities are expected to maintain a hawkish stance given inflation, while cooling, is still elevated.
The dollar was steady after it hit its strongest since November in a muted start to trading in currency markets. The yen was little changed at just above 148 per dollar.
Annual wage negotiations in Japan have kicked off in earnest, as its central bank looks for evidence of a virtuous wage-price cycle that would allow it to exit from the world’s last negative rate regime.
In the US, Fed Bank of Minneapolis president Neel Kashkari said officials have time to gauge incoming data before easing while his Chicago counterpart Austan Goolsbee reiterated he’d like to see more of the favourable inflation data.
The world’s major central banks mustn’t drop their guard in the fight against inflation as it’s too soon to say if sharp interest rate increases have contained underlying price pressures, the OECD said. Meanwhile, the latest Bloomberg Markets Live Pulse survey showed American shoppers won’t be deterred by mounting credit-card bills or the recent ripple of layoffs. More than half of 463 respondents said spending will stay strong or get even stronger in 2024.
“The ongoing strength of the US economy relative to most of its G-10 peers is one of the key reasons why we have held a counter consensus bullish view on the USD since September 2023,” said Dominic Bunning at HSBC.
Elsewhere, gold inched higher to trade at around $2,027 per ounce. West Texas Intermediate was slightly higher. Bitcoin edged higher at above $42,500.