An pedestrian passing the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Wednesday, 12 June 2024. The equity losses in Japan contrasted with gains in Taiwan and South Korea after the Federal Reserve signalled on Wednesday it’s close to cutting rates in September. US index futures rose, adding to advances on Wall Street, as Meta Platforms Inc. reported better-than-expected sales after the close.
The diverging fortunes reflected how traders are positioning for the narrowing of US-Japan rates differentials after the two central bank decisions on Wednesday. After raising rates, Bank of Japan Governor Kazuo Ueda said more increases will come if its price forecasts are met. Japan’s Topix index tumbled by almost 4% before slowing down, as the yen touched 148.51 against the dollar, the strongest it has been since March.
“The volatility of the yen has risen since the shifting Fed expectations after US CPI numbers on 10 July,” said Societe Generale strategist Frank Benzimra. “The BOJ hike decision yesterday amplified the volatility. We see some carry trade starting to reverse. We are at inflection points. It doesn’t mean the end of the Japan bull market, but a pause, and importantly some shift back to domestic sectors.”
A Bloomberg index of dollar strength had its worst day since May on Wednesday, supporting a rally in emerging markets and Asian currencies excluding yen. The Malaysian ringgit strengthened to levels not seen in almost a year against the dollar, while the Thai baht traded at a four-month high.
“The Fed finally suggested that the rate cut is likely to come soon, which Asian markets have been waiting for a long time,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “Most of the Asian currencies are likely to gain against the US dollar in the short term.”
Treasuries fell in early Asian trading to partly unwind a Wednesday rally across the curve. The US 10-year yield fell 11 basis points on Wednesday to 4.03%. Australia and New Zealand yields fell early Thursday, tracking gains for Treasuries in the prior session. Gains for US debt also reflected reports that Iran had ordered retaliation against Israel for the killing of a Hamas leader on its soil.
Gold edged higher and was within striking distance of its peak.
Chinese stocks erased early gains following data showing a surprise July contraction in a key manufacturing gauge.
The pound was steady ahead of a Bank of England interest rate decision due later Thursday. The central bank is expected to reduce rates by 25 basis points, according to consensus forecasts compiled by Bloomberg, which would be the first cut since the start of the pandemic.
Federal Reserve
The changes in the Fed statement solidify a shift in tone among several policymakers, including Powell, recognizing growing risks to the labor market. They are also likely to reinforce expectations among economists and investors for a rate cut at the central bank’s 17 - 18 September gathering.
“Powell so wants to say today ‘let’s do it’ — but at the same time, he knows he doesn’t have to commit just yet before he gets more time and data,” said Peter Boockvar at the Boock Report.
Given markets were already fully priced for a September cut, neither the Fed’s statement nor Powell’s remarks dramatically changed the rate path into the bond market, according to Tiffany Wilding at Pacific Investment Management Co.
Interest-rate swaps showed traders are still fully priced in a quarter point cut in September — and a total of almost 70 basis points worth of reductions for the year.
“The data has moved in Powell’s direction and now he’s getting ready to follow,” said David Russell at TradeStation. “Jobs data on Friday and CPI in two weeks are the next big items. If those go well, we could get clearer messaging from Powell at Jackson Hole in late August.”