SINGAPORE: Asian stocks slid, bond yields rose and the dollar was perched near a two-year high on Thursday after the U.S. Federal Reserve cautioned it would ease the pace of rate cuts in the coming year and investors braced for a Bank of Japan policy decision.
The Fed cut interest rates on Wednesday as expected, but Chair Jerome Powell’s explicit references to the need for caution from here on sent U.S. stocks sharply lower, with Treasury yields surging and traders scaling back bets on rate cuts next year.
The Dow Jones Industrial Average, plunged more than 1,000 points.
Asian stocks have taken the cue from Wall Street, with MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), opens new tab down 1%. Japan’s Nikkei, fell 1.8%, while Australian shares, tab slid more than 2%.
“I think we’re in a good place, but I think from here it’s a new phase and we’re going to be cautious about further cuts,” Powell said at a press conference.
U.S. central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025, which is half a percentage point less in easing next year than officials anticipated as of September.
“The Fed was more hawkish than we anticipated but today’s shift in policy guidance plays right into our view of a long pause by the Fed at the start of 2025,” said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.
“The most meaningful surprises were concentrated on the inflation projections. They reinforce higher for longer is back.”
The shifting expectation of Fed rate cuts lifted the dollar index , which measures the U.S. currency against six rivals, to its highest since November 2022 on Wednesday. It was last at 108.15 in early trading on Thursday.
Sterling was steady at $1.25835 ahead of the Bank of England policy decision later in the day where the central bank is expected to keep interest rates unchanged, despite signs of a slowing economy.
The yield on benchmark U.S. 10-year notes touched a seven-month high of 4.524% on Wednesday and was last at 4.51% in early Asian hours.
Tony Sycamore, market analyst at IG, said the outcome of the Fed meeting should not have come as too much of a surprise to investors who have watched the recent run of warm U.S. inflation and activity data.
“However, it has served as the catalyst to wash away some of the speculative excesses that flowed into risk assets, including stocks and Bitcoin, following the US election,” he said.
Bitcoin eased to $100,340 after dropping 5% on Wednesday after Powell said the U.S. central bank has no desire to be involved in any government effort to stockpile large amounts of bitcoin.
The rising Treasury yields along with the looming policy decision from the Bank of Japan later in the day sent Japan’s 10-year government bond yield surging.
The BOJ’s policy decision comes as the yen hovers around the 155 per dollar mark, the weaker end of a 139.58 to 161.96 range it has held this year while under pressure from a strong dollar and a wide interest rate disadvantage, despite the Fed’s rate cuts.
Asian shares drift, dollar firms ahead of central bank meetings
On Thursday, the yen last fetched 154.81 per dollar, having touched a one-month low of 154.88 earlier in the session. The yen is down more than 8% this year against the dollar and is set for a fourth straight year of decline.
Traders currently price in just a 20% chance of the BOJ hiking rates later on Thursday, with policymakers keeping markets guessing and market expectations shifting from December to January for the next hike.
Investor focus will be on comments from BOJ Governor Kazuo Ueda to gauge not just the timing of the next rate hike but the extent of hikes next year. Traders are currently pricing in 44 basis points of BOJ hikes by the end of 2025.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, said the recent sharp yen weakening will add pressure on the BOJ to hike on Thursday.
“We stick to our call for a 25 basis point hike because of high inflation, business confidence and wage growth. But we would not be surprised if the BOJ delays the rate hike until January … we expect it (BOJ) will lay the groundwork for a hike in early 2025.”
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