Asia tentative actions; dollar, yields crushed on the Fed’s huge bets by Reuters

By Rae Wee

SINGAPORE (Reuters) – Asian shares wobbled on Tuesday as the dollar and U.S. Treasury yields came under pressure, just a day before the expected start of the Federal Reserve’s easing cycle that could prompt policymakers to reduce interest rates.

Extended holidays in China and South Korea created soft trading conditions, with investors focused on the Fed’s decision on Wednesday as odds rose over the past week in favor of a 50 basis point rate cut.

That kept the dollar languishing near its lowest level in more than a year against the yen at 140.70, weighed down further by a drop in US Treasury yields.

The two-year Treasury yield, which typically reflects short-term rate expectations, was last at 3.5571 percent, after falling to a two-year low of 3.5280 percent overnight.

The benchmark 10-year yield was little changed at 3.6195%. (US/)

Futures show markets now peg a 67 percent chance the Fed will cut rates by half a percentage point at the conclusion of its policy meeting on Wednesday, after a series of media reports revived the prospect of more aggressive easing.

“The case for a 50 bps rate cut this week hinges in part on the idea that rates are well above most neutral estimates — if officials believe that keeping policy in tight territory for too long creates unnecessary risk to the economy, then it has sense dragging its feet,” said Neil Shearing, group chief economist at Capital Economics.

“The problem is that this is a high bar for a big rate cut, especially early in the easing cycle. If nothing else, it creates the impression that central bankers have made a mistake and fallen behind the curve.”

For this year, markets have priced in about 120bps of relaxation through December.

Uncertainty over the scale of the Fed’s likely rate cut on Wednesday kept shares in Asia lower, with MSCI’s broadest index of Asia-Pacific shares outside Japan up just 0.1 percent.

fell 0.6 percent, dragged down by tech names as they tracked a decline on Wall Street.

Stock futures were mixed. futures and Nasdaq fell 0.12% and 0.05% respectively, while EUROSTOXX 50 futures fell more than 0.3% each.

DECISIONS TO MISS

The Bank of England (BoE) and Bank of Japan (BOJ) also meet this week to discuss monetary policy, with both central banks seen keeping rates on hold.

Expectations of less aggressive easing from the BoE in turn kept sterling supported. It was last down 0.09% at $1.3204 but not far from the August peak of $1.3269, the strongest level since March 2022.

“We expect the BoE to keep the Bank Rate unchanged at 5.0% at its September policy meeting,” ANZ economists said. “We expect him to take a gradual approach in the first part of his relaxation cycle.”

Elsewhere in Asia, China’s shaky economic recovery continued to weigh on sentiment after weekend data showed the country’s industrial output growth slowed to a five-month low in August, while retail sales and home prices we fell further.

However, worries about falling Chinese oil demand were overshadowed by Hurricane Francine’s continued impact on production in the US Gulf of Mexico, sending oil prices higher on Tuesday.

Futures rose 0.18% to $72.89 a barrel, while U.S. futures rose 0.43% to $70.40 a barrel. (OR)

fell 0.06% to $2,580.51 an ounce. (EMPTY/)