Fed’s ‘tight cut’ slams markets, Bank of Japan is next

Written by Jamie MacGyver

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

The Fed has spoken, and as far as investors are concerned, the message has been clear – clearly hawkish. Now it’s up to the Bank of Japan and the Bank of England, the two largest and most important banks in the central bank’s set of policy decisions on Thursday.

This latest wave of central bank meetings has reached its peak with decisions on Thursday also coming from Norway, Sweden and, more importantly from an Asian perspective, Taiwan and the Philippines.

Investors in Asia on Thursday entered a defensive stance after the Federal Reserve cut interest rates by a quarter of a percentage point as expected, but signaled a slowdown in the pace of future easing.

Fed officials raised their median forecast for where they see the long-term neutral rate, sharply raised their inflation forecast for 2025, and continued to chart a path for more interest rate cuts next year.

Rising inflation coupled with continued easing is a cycle that Fed Chairman Jerome Powell struggled to resolve in his press conference. As he spoke with reporters, the selling of stocks and Treasuries accelerated and the dollar rose to higher levels.

Wall Street ended the day sharply lower. The Nasdaq fell more than 3%, the Dow Jones fell for a 10th day — its longest losing streak in 50 years — the dollar jumped to a two-year high and bond yields rose across the curve.

As Dan Seluk of Janus Henderson points out, there is potential for an “extended pause” next year, and the Fed is signaling that “we are in an environment of structurally higher inflation and prices.”

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

Now all eyes in Asia are on Tokyo. The Bank of Japan is expected to keep interest rates unchanged, leaving investors influenced by Governor Kazuo Ueda’s comments in his press conference.

Japanese swap rates indicate a 60% chance the Bank of Japan will raise interest rates by 25 basis points in January, down from about 70% two weeks ago. The swap curve shows that a quarter-point rate hike is not fully priced in until May, and policy is expected to be tightened by just 45 basis points by December.

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

Although inflation rose for a second month in November to 2.5%, it fell within the central bank’s target of 2% to 4%. This will be the third reduction in a row, and economists expect three more cuts next year.

Meanwhile, policymakers in Taiwan are expected to keep the key interest rate unchanged at 2% and keep it at that level throughout next year in light of the strong economy and inflation fears.

The story continues