Morning Bid: Fed’s ‘hawkish cut’ slams markets, BOJ up next

12/18/2024

2 minutes read

2024.12.18 17:17

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

The Federal Reserve has spoken, and as far as investors are concerned, the message was clear – clearly hawkish. Now it’s over to the Bank of Japan and Bank of England, the two biggest and most important of the clutch of central bank policy decisions on Thursday.

This recent burst of central bank meetings reaches its crescendo with decisions on Thursday also coming from Norway and Sweden, and more importantly from an Asian perspective, Taiwan and the Philippines.

Investors in Asia go into Thursday on the defensive after the Fed cut interest rates by a quarter of a percentage point as expected, but signaled a slower pace of easing ahead.

Fed officials raised their median projection of where they see the long run neutral rate, significantly raised their 2025 inflation outlook, and continued to sketch out a path of further rate cuts next year.

Higher inflation coupled with continued easing is a circle Fed Chair Jerome Powell struggled to square in his press conference. And as he spoke with reporters, the selloff in stocks and Treasuries accelerated and the dollar soared even higher.

Wall Street ended the day sharply lower. The Nasdaq slumped more than 3%, the Dow fell for a tenth day – its longest losing streak in 50 years – the dollar jumped to a two-year high and bond yields rose across the curve.

As Janus Henderson’s Dan Siluk noted, there is potential for an “extended pause” next year, and the Fed is indicating that “we are in a structurally higher inflation and rates environment.”

Emerging market assets will almost certainly come under heavy pressure on Thursday.

All eyes in Asia now turn to Tokyo. The BOJ is expected to keep interest rates on hold, leaving investors to take their cue from Governor Kazuo Ueda’s remarks in his press conference.

Japanese swap rates imply a 60% probability the BOJ will raise rates by 25 bps in January, down from around 70% a couple of weeks ago. A quarter-point hike is not fully priced until May, and only 45 bps of tightening in total is expected by December, the swaps curve shows.

The Philippine central bank is expected to cut its key policy rate by a quarter point to 5.75%, according to a Reuters poll, with inflation under control and the economy weakening.

Despite inflation rising for a second month in November to 2.5%, it is well within the central bank’s 2%-4% target. This would be its third cut in a row, and economists expect a further three reductions next year.

Policymakers in Taiwan, meanwhile, are expected to keep the key policy rate unchanged at 2% and hold it there throughout next year given the strong economy and inflation concerns.

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

– Japan interest rate decision