Asian stocks edged lower on Friday as traders grappled with the Federal Reserve’s signals that interest rates might remain elevated for a longer period, despite early signs of easing inflation in the United States. This cautious stance from the Fed has injected a dose of uncertainty into the markets.
Wednesday’s data showing a slowdown in U.S. consumer price inflation initially fueled market expectations for at least two rate cuts this year. However, this optimism was tempered by subsequent reports indicating a tight labor market, prompting Fed officials to maintain a cautious approach regarding inflation.
Currently, traders are pricing in 47 basis points of easing from the Fed this year, with a rate cut in November fully anticipated.
The MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.14%, following a surge to a two-year high on Thursday. Despite Friday’s decline, the index was on track for a weekly gain of 2.6%, marking its fourth consecutive week of gains. Japan’s Nikkei fell 0.48%, while Chinese stocks saw slight gains, with the blue-chip index rising 0.15% in early trading. Hong Kong’s Hang Seng Index stood out, rising 0.77% and reaching its highest level since August 2023.
“Following the incremental softening of the U.S. data, this is probably as far as the risk rally can go in the absence of tier-1 data over the coming week,” commented Nicholas Chia, Asia macro strategist at Standard Chartered.
Despite the promising inflation data, Fed policymakers have not yet signaled a shift in their stance on rate cuts. Federal Reserve Bank of New York President John Williams stated, “Monetary policy is ‘restrictive’ and ‘is in a good place.’ I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now.”
The latest labor market data from Thursday revealed a drop in the number of Americans filing new claims for jobless benefits, suggesting that labor market conditions remain tight even as job growth cools.
In the U.S., the Dow rose to a high of 40,051.05, while the S&P 500 and Nasdaq also hit record highs before closing slightly lower.
In currency markets, the dollar was headed for its largest weekly decline versus the euro in over two and a half months, with the euro up roughly 1% against the dollar, last trading at $1.08595. The yen weakened by 0.23% to 155.80 per dollar in early trading, partially reversing gains made after the U.S. CPI report earlier in the week.
The yen has depreciated around 9.5% this year, influenced by the Bank of Japan’s loose monetary policy in contrast to higher U.S. interest rates attracting investment towards U.S. bonds and the dollar. Tokyo is suspected to have intervened to support the yen after it plummeted to its lowest level in over three decades.
“While the weaker U.S. data should benefit low-yielders like the yen, the recent price action suggests the Japanese authorities may have more to do beyond verbal jawboning if they intend to keep speculators at bay,” noted Chia of Standard Chartered.
In commodities, oil prices saw gains during Asian trading hours. Brent crude was set for its first weekly increase in three weeks on signs of improving global demand and slowing inflation in the U.S., a major oil consumer. U.S. crude remained steady at $79.18 a barrel, while Brent rose slightly to $83.35 per barrel.
Gold prices stood at $2,377.25 per ounce, reflecting the ongoing market adjustments amid global economic developments.