14-6-2023 (HONG KONG) Asian markets experienced a mixed performance on Wednesday (Jun 14) following the release of data indicating a further decline in US inflation. This development has heightened expectations that the Federal Reserve will finally pause its campaign of interest rate hikes.
While the decline in US consumer price index exceeded expectations, it aligns with recent indicators suggesting that the 15-month tightening of central bank policies is beginning to take effect. The drop also comes after a mixed jobs report earlier this month, which indicated a resilient labor market and provided the Fed with an opportunity to forgo a rate hike in June.
The latest CPI reading of 4 percent is the lowest since March 2021, although it remains double the target set by the Fed. Traders are currently pricing the chances of a rate hike on Wednesday at approximately 10 percent. Analysts believe that Jerome Powell, the head of the central bank, will emphasize that a pause in rate hikes does not signify the end of tightening.
Stephen Innes, from SPI Asset Management, stated, “Decelerating inflation… coupled with full employment may suggest to some that the US is on a path to a soft landing of its economy, and avoiding the recession that so many have been concerned about is looming for over a year now.” He expects the Fed to pause its rate-hiking cycle to assess the lagged effects of its policies and evaluate the impact of the regional banks’ turmoil in March on lending markets.
Lindsey Piegza, of Stifel Nicolaus & Co, believes that the Fed is now obligated to maintain the status quo. She warns that failing to pause at this point would cause unnecessary concern, but adds that the Fed will need to communicate that its work is not yet complete.
Wall Street responded positively to Tuesday’s inflation reading, with the S&P 500 achieving its fourth consecutive gain and nearing the 4,400-point mark last reached in April 2021.
Asian markets initially followed this positive trend, but some experienced declines as the day progressed. Tokyo, Sydney, Singapore, Wellington, Taipei, Mumbai, and Bangkok all saw gains, while Hong Kong, Shanghai, Seoul, Manila, and Jakarta faced slight dips. In Europe, London saw a morning rise due to data showing modest economic growth in the UK driven by strong consumer spending. Paris and Frankfurt also experienced marginal gains.
Investors are closely monitoring developments in Beijing amid reports of potential measures to revive the struggling Chinese economy. The surprise decision by the central bank on Tuesday to reduce a short-term lending rate has fueled speculation of a similar move for the medium-term rate later in the week. Analysts suggest that authorities may also decrease the reserve requirements for lenders in order to inject more liquidity into financial markets.
Aisa Ogoshi, from JPMorgan Asset Management, stated, “We cannot expect the kind of stimulus that we’ve seen in the past, i.e. the property sector-led stimulus.” She anticipates support measures targeted at consumers, adding that “the macro backdrop is good for stock pickers.”
Crude oil prices extended Tuesday’s rally of over 3 percent, driven by the prospect of a pause in US interest rate hikes and potential Chinese stimulus. Edward Moya from OANDA noted that the rate cut by China “sent a message to traders that the world’s second largest economy is finally going to get significant stimulus that should help with their struggling post-COVID recovery.” Additionally, energy traders are anticipating the impact of Saudi oil price cuts, which are expected to tighten the market quickly next month.
However, the International Energy Agency issued a warning on Wednesday that global oil demand will likely peak before the end of the decade and subsequently decline as countries transition away from fossil fuels. The agency attributed the acceleration of this transition to Russia’s invasion of Ukraine.
