In anticipation of the Federal Reserve’s upcoming decision, Asian markets experienced broad gains. The yen strengthened, rebounding from near its weakest level this year, following a warning from Japan’s foreign exchange chief about the potential for currency intervention.
MSCI’s Asia Pacific Index increased by approximately 1%, with Japanese stocks leading the way. The Topix benchmark recorded its most significant gain in a year. Shares in Hong Kong and mainland China displayed fluctuation following a private survey indicating a contraction in China’s manufacturing activity. S&P 500 futures marginally declined, despite the index’s rebound in the final day of October.
Elsewhere, Treasury 10-year yields saw a slight dip after a previous session of gains. Traders are reacting calmly to the latest US economic data, anticipating another decision to hold interest rates by the Federal Reserve. All eyes are also on the US government’s new borrowing plan, scheduled to be released shortly before the Fed’s announcement.
Yves Bonzon, Global CIO of Julius Baer, stated, “We are really at the end of that tightening cycle, but not yet at the point at which the Fed will have more nuanced guidance for investors going forward.” He emphasized that the FOMC has “every reason to keep the options open,” especially given robust US economic data.
Japanese bond futures partially recovered from their losses after the central bank announced unscheduled bond-purchase operations to curb yield increases following its policy decision. The 10-year bond yield reached a fresh decade high of 0.97% after the Bank of Japan unveiled a more flexible approach to controlling benchmark security rates.
Rie Nishihara, chief Japan equity strategist at JPMorgan Securities, noted that higher interest rates could have a positive impact on Japan’s financial stocks and a minimal negative impact on growth stocks. She explained that the rise in long-term interest rates in Japan is expected to be minor, and Japanese corporations are well-capitalized.
For currency traders, the Bank of Japan’s policy adjustments appeared insufficient to indicate significant progress toward monetary tightening. The yen experienced its most significant one-day drop since April, approaching the 152 level that prompted Japanese authorities to intervene last year.
The yen strengthened after Japan’s chief currency official, Masato Kanda, stated that authorities are prepared to intervene if needed, noting certain movements that deviate from fundamentals. Toyota Motor shares advanced following an announcement of a higher full-year operating profit forecast and a 100 billion yen share buyback.
In economic news, US consumer confidence declined to a five-month low in October, while employment costs unexpectedly accelerated in the third quarter, highlighting a robust labor market that poses potential challenges to keeping inflation within the Fed’s target.
In addition to the eagerly awaited Fed decision, bond dealers are anticipating another round of increases in the Treasury’s note and bond auctions this week. Nevertheless, some foresee the department slowing the pace of growth to prevent a sudden rise in yields.
Investors are closely monitoring the ongoing earnings season to assess profit outlooks and how companies manage headwinds like higher interest rates. In October, US stocks faced declines, largely influenced by disappointing performances from tech giants, including Google parent Alphabet Inc. and Facebook owner Meta Platforms Inc.
In other markets, oil prices edged higher after experiencing declines in the first two days of the week, with global demand attention turning to the ongoing Israel-Hamas conflict. Meanwhile, gold was poised to close lower for a third consecutive session.
Key events this week:
- UK S&P Global / CIPS UK Manufacturing PMI, Wednesday
- US construction spending, ISM Manufacturing, job openings, light vehicle sales, Wednesday
- All Saints holiday in much of Europe, Wednesday
- Treasury quarterly refunding announcement, Wednesday
- Federal Reserve interest rate decision. Fed Chair Jerome Powell holds a news conference, Wednesday
- Eurozone S&P Global Eurozone Manufacturing PMI, Thursday
- Bank of England interest rate decision. Governor Andrew Bailey holds a news conference, Thursday
- US factory orders, initial jobless claims, productivity, Thursday
- Apple earnings, Thursday
- China Caixin services PMI, Friday
- Eurozone unemployment, Friday
- US unemployment, nonfarm payrolls, Friday
- Canada employment report, Friday
