Asian stocks experienced their most significant decline in approximately two weeks as Federal Reserve officials tempered expectations of aggressive interest rate cuts in the coming year. The MSCI Asia Pacific Index saw a loss of up to 1.1%, marking the most substantial drop since December 5. Hong Kong led the decline with nearly a 1% fall. Meanwhile, US futures showed a modest uptick following the conclusion of a six-day rally for the S&P 500. The dollar maintained stability, and two-year Treasury yields reversed the gains observed on Friday when New York Fed President John Williams and other officials cautioned against premature considerations of lowering borrowing costs.
This pushback from the Fed could potentially disrupt the prevailing ‘everything rally.’ Traders had previously interpreted Fed signals as a signal to intensify bets on rate cuts in the coming year, contributing to the most substantial weekly gains in a month for both US and Asian shares. Swaps traders adjusted their expectations for cuts in 2024 from six to just under five following the recent Fed remarks, according to data compiled by Bloomberg.
Central bankers worldwide are engaging in a dialogue with traders to manage expectations. Atlanta Fed President Raphael Bostic, a voting member on monetary policy next year, anticipates two rate cuts in 2024, but not until the third quarter. Separately, Chicago Fed President Austan Goolsbee emphasized that considering rate cuts is premature until officials are convinced that inflation is trending lower towards its target. Bank of Canada Governor Tiff Macklem echoed similar sentiments.
Bob Savage, Head of Markets Strategy and Insights at BNY Mellon Capital Markets, highlighted the need for US markets to validate the Fed’s pushback, emphasizing lower core PCE, weaker 3Q GDP revisions, and modest consumer confidence as key indicators. He stated, “At the heart of the week ahead is the risk that financial conditions everywhere are easier and sparking more growth and inflation than forecast.”
In Europe, European Central Bank Governing Council member Joachim Nagel asserted that it is too early to contemplate rate cuts. Another council member, Madis Muller, cautioned that markets might be premature in anticipating policy easing in the first half of the next year. ECB President Christine Lagarde clarified that the bank had not discussed rate cuts at all.
