Marketmind: Can risk appetite resist Fed’s hawkish skip?

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

A raft of economic data and a likely medium-term policy easing from China will give Asian markets direction on Thursday, but the main steer will probably come from investors’ reaction to the Federal Reserve’s ‘hawkish skip’ on interest rates.

The Fed paused its policy tightening cycle on Wednesday for the first time but signaled in new economic projections that rates will likely rise by another half of a percentage point by the end of this year as it continues to try to get inflation down.

Short-dated Treasury yields jumped, the U.S. yield curve inversion deepened, and the dollar fell. But Wall Street put up a better fight – although the Dow had its worst day in two weeks, the Nasdaq rebounded and closed up for a fifth day at a new 14-month high, and the basically ended flat.

Will Asian markets show similar resilience, or will the prospect of another 50 bps of Fed tightening this year – plus the lagged impact of the previous 500 bps – weigh on investors and prompt a profit-taking reversal?

Japanese stocks could be the most vulnerable to a correction. The benchmark on Wednesday rallied another 1.4% to a fresh 33-year peak above 33,500 points, its 20th rise in the last 25 trading sessions.

Markets have the latest trade and machinery orders data from Japan to digest on Thursday. Trade activity in May is expected to have slumped – economists are forecasting a 10% year-on-year slump in imports and a 0.8% fall in exports.

China’s central bank, meanwhile, is expected to cut the borrowing cost of medium-term policy loans for the first time in 10 months on Thursday, after it lowered two key short-term policy rates earlier this week.

An outlier among its global peers, the People’s Bank of China is battling disinflation – perhaps even deflation soon – and an under-performing economy that has significantly soured investors’ outlook on the country’s financial assets.

Further easing may help shore up confidence in the economy, but will widen the yield gap with overseas assets, put the yuan under further pressure, and risk even greater capital outflows – the Institute of International Finance said on Wednesday net inbound foreign direct investment to China in 2023 will be the lowest in 18 years.

Beijing also releases a batch of top-tier economic indicators for May on Thursday – urban investment, industrial production, house prices, retail sales and unemployment – which are broadly expected to reflect a weak growth environment.

The annual rate of growth in investment is seen slowing to 4.4% from 4.7%, industrial production to 3.6% from 5.6%, and retail sales to 13.6% from 18.4%.

Here are key developments that could provide more direction to markets on Thursday:

– China investment, industrial production, house prices, retail sales, unemployment (May)

– China medium-term lending facility loan rate

– Australia unemployment (May)

(By Jamie McGeever)

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