Asian markets experienced a surge on Thursday as investors placed their bets on the Federal Reserve potentially pivoting its monetary policy, following more dovish remarks from Fed officials. With all eyes on the U.S. consumer inflation report later in the day, markets were looking for further clues about the future direction of the U.S. economy.
Positive Momentum in Asian Markets
MSCI’s broadest index of Asia-Pacific shares outside Japan advanced by 0.7%, reaching its highest level in three weeks. Tokyo’s market rallied by 1.3% for a third consecutive day, rebounding from its recent five-month low. Meanwhile, Hong Kong’s market jumped by an impressive 1.8%, driven by a 3% surge in banking shares after China’s state fund, Central Huijin Investment, increased its stakes in the four major banks. China’s blue chips also made gains, rising by 0.7%.
Impact of Federal Reserve’s Position
Overnight, Wall Street closed higher, largely due to Federal Reserve minutes that revealed a growing sense of uncertainty about the path of the U.S. economy. Concerns were raised regarding volatile data and tightening financial markets, posing potential risks to economic growth. In response, policymakers decided to extend a rate pause last month. The recent surge in sentiment can be attributed to comments from various Fed officials suggesting that U.S. interest rates may have already peaked, resulting in a pullback in Treasury yields.
U.S. Fed Governor Christopher Waller stated that higher market interest rates may help slow inflation, emphasizing the importance of “watching and seeing” whether the policy rate needs to rise again. Waller’s stance aligns with similar statements made earlier by Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan. This collective sentiment pushed the dollar to a two-week low.
Market Expectations and Probabilities
The market has significantly reduced the chances of a Fed rate hike in November to just 9%, down from 13.2% a day earlier. There is now a 70% probability that the rate has already reached its peak, as per CME FedTool.
With the much-anticipated pivot by the Federal Reserve on the horizon, traders are bracing themselves for the U.S. consumer inflation report. The stakes are even higher following a producer price inflation report that came in hotter than expected the previous day. Economists anticipate a 0.3% increase in the headline Consumer Price Index (CPI) for September compared to August, with the core CPI expected to remain steady at 0.3%.
Alan Ruskin, Chief International Strategist at Deutsche Bank AG, warned that an upside surprise in the core rate, exceeding 0.4%, could catch investors off guard. However, geopolitical risks are likely to prevent the bond market from reacting too negatively to stronger data. A 0.4% month-on-month core number would further support the case for the Fed to maintain a hawkish stance.
Long-Dated Treasury Yields and Safe-Haven Demand
Long-dated treasury yields have eased for the third consecutive session, benefiting from some safe-haven demand triggered by the ongoing conflict in the Middle East. Ten-year yields fell by 3 basis points to 4.5623% on Thursday, moving away from their 16-year high of 4.8870%.
Oil Prices and Precious Metals
Oil prices extended their declines on Thursday, primarily due to Saudi Arabia’s commitment to help stabilize the market amidst fears of supply disruptions stemming from the conflict between Israel and Palestine. Crude futures eased by 0.4% to $85.47 a barrel, following a 2% drop in the previous session. U.S. West Texas Intermediate crude also fell by 0.5% to $83.05, after a 2.9% plunge on Wednesday. Gold, on the other hand, saw a 0.2% increase, reaching $1,876.77 per ounce, marking one of its highest levels in two weeks.
The Asian market’s positive momentum can be largely attributed to expectations of a potential shift in the Federal Reserve’s monetary policy. With Federal Reserve officials adopting a more dovish stance, markets are anticipating that U.S. interest rates may have already peaked. The dollar has weakened, and the probability of a Fed rate hike in November has significantly decreased. However, the focus now shifts to the U.S. consumer inflation report, with the market eagerly awaiting the results. In this volatile environment, investors should remain cautious, keeping a close watch on developments and economic data that can influence market dynamics.