SINGAPORE: Asian shares were subdued on Thursday and the dollar was on the defensive after US data showed progress in slowing inflation had stalled even as the economy remained resilient, raising doubt over the path the Federal Reserve could take next year.
With the US Thanksgiving holiday likely to keep trading thin for the rest of the week, traders remained hesitant in placing major bets.
MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.07% lower, with Japan’s Nikkei up 0.46%.
Sentiment remained frail as investors pondered the possibility of a tariff war sparked by US President-elect Donald Trump’s policies.
Data on Wednesday showed US consumer spending increased slightly more than markets expected in October but progress on lowering the rate of inflation appears to have stalled in recent months.
The lack of success in bringing inflation back to the Fed’s 2% target, together with the prospect of higher tariffs on imported goods, could narrow the scope for interest rate cuts next year.
While the Fed is still widely expected to deliver a third rate reduction in December, minutes of the Federal Open Market Committee’s Nov. 6-7 policy meeting published on Tuesday showed officials appeared divided over how much farther they may need to cut rates.
Asian stocks weak amid Trump tariff worries; yen firm
“We continue to expect the FOMC to cut the Funds rate by 25 basis point at its December meeting,” said economist Kristina Clifton at the Commonwealth Bank of Australia.
“However, another solid monthly core inflation for November will challenge the FOMC’s view that inflation is trending down to 2%/year. Doubts around inflation converging sustainably to target would reduce market expectations for a December cut.”
Traders are pricing in 65% chance of the Fed cutting rates next month and are anticipating 75 basis points of easing by the end of 2025, LSEG data showed.
Macquarie strategists said the inflation outlook has become cloudier, with the possibility of the implementation of tariff threats by the incoming Trump administration having the potential to create a renewal of upward pressure in core goods.
“While tariffs introduced in 2018/2019 didn’t ultimately prove inflationary, we caution on extrapolating to the current circumstances,” they said in a client note.
In a surprise move, South Korea’s central bank cut benchmark interest rates for a second consecutive meeting on Thursday as the economy stalled and inflation slowed more than policymakers predicted.
The won weakened after the decision. The yen was 0.3% lower at 151.615 per dollar but remained close to the one-month high it touched in the previous session.
The Asian currency is headed for its strongest weekly performance since early September on growing expectations of a rate hike from the Bank of Japan next month.
The euro was steady after rising 0.7% in the previous session as investors pulled back on rate cut bets in the wake of European Central Bank board member Isabel Schnabel saying that cuts should be gradual and move to neutral, not accommodative, territory.
In commodities, oil prices were steady as worry over supply was eased after a ceasefire deal between Israel and Hezbollah.
Brent crude futures were little changed at $72.8 a barrel. US West Texas Intermediate crude was steady at $68.7.
Spot gold eased to $2,626 per ounce.