The cautious sentiment in Asian markets on Wednesday was driven by anticipation surrounding a U.S. inflation reading later in the week, which could impact the Federal Reserve’s approach to monetary policy easing. Meanwhile, the New Zealand dollar experienced a decline following the central bank’s softened hawkish stance.
MSCI’s broadest index of Asia-Pacific shares outside Japan dipped by 0.44% to 525.40 points, although it remained close to a near seven-month high of 531.56 after a robust rally. Notably, the index has recorded a 4.4% increase for the month, marking its strongest February performance in over ten years.
In Europe, the sentiment is expected to mirror the cautiousness seen in Asia, with Eurostoxx 50 futures down by 0.12%, while German DAX futures showed a slight uptick of 0.06%.
Investor attention is predominantly focused on the release of the personal consumption expenditures price index (PCE) for January, which serves as the Fed’s preferred inflation gauge, scheduled for Thursday. Analysts anticipate a 0.3% monthly increase in the PCE for January, slightly higher than the 0.2% uptick observed in December, according to a Reuters poll.
Recent robust economic indicators, coupled with persistent inflationary pressures, have led traders to significantly revise down their initial expectations of aggressive and immediate interest rate cuts by the Fed.
The market’s anticipation of the easing cycle has shifted, with June now seen as the likely starting point compared to March earlier in the year. Traders are currently pricing in 77 basis points of cuts for this year, a significant adjustment from the 150 basis points of easing expected at the beginning of the year.
Yuting Shao, macro strategist at State Street Global Markets, highlighted the significance of individual data releases for a data-dependent Fed, which could impact risk sentiment given investors’ near-neutral positioning.
“While one data point alone may not establish a trend, recent readings on inflation and employment have raised the possibility that a ‘no landing’ scenario is influencing many asset markets.”
Additional data scheduled for release this week, including the second estimate of gross domestic product, jobless claims, and manufacturing activity, will also contribute to shaping expectations regarding Fed policy.
Recent statements from Fed policymakers have signaled a reluctance to implement rate cuts too soon. Governor Michelle Bowman emphasized on Tuesday that she was not in a hurry to lower U.S. interest rates, particularly considering the upside risks to inflation that could impede progress or lead to a resurgence of price pressures.
The Reserve Bank of New Zealand (RBNZ) opted to keep the cash rate unchanged at 5.5% on Wednesday, citing the effectiveness of previous rate hikes in curbing prices. However, it also indicated that the likelihood of further rate increases had diminished, leading to a more than 1% drop in the New Zealand dollar to $0.6101, marking a nearly two-week low.
Charu Chanana, head of currency strategy at Saxo, noted that the RBNZ’s decision to rule out additional rate hikes came as a surprise, given somewhat hawkish expectations. This development may prompt unwinding of NZD long positions in the short term, although the New Zealand dollar continues to offer attractive carry in a low volatility environment.
In Australia, the dollar showed some volatility following data revealing that consumer price inflation remained at a two-year low in January. This reinforced market sentiment that interest rates are unlikely to see further increases. The Aussie dipped by 0.43% to $0.6515.
The dollar index, measuring the U.S. currency against six major peers, experienced a modest increase of 0.116%.
The Japanese yen remained steady around the psychologically significant level of 150 per dollar, with the Nikkei index ending the day marginally lower after hitting new record highs earlier in the week.
In China, stock markets declined as investors opted to cash in profits following a recent rally. Concerns persist regarding the property sector, particularly after a liquidation petition was filed against developer Country Garden. Hong Kong’s Hang Seng index dropped by 1.1%, while China’s blue-chip CSI300 index was down by 0.27%.
Crude oil prices saw a slight decline, with U.S. crude slipping by 0.41% to $78.55 per barrel and Brent crude at $83.30, down 0.42% for the day. The prospect of a delayed U.S. rate-cutting cycle offset the positive impact of discussions about extending production cuts from OPEC+.
Spot gold prices edged up by 0.1% to $2,030.83 per ounce.