Morning Bid: The Fed’s Close Call

By Jamie McGeever

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

Investors in Asia will be forgiven for any reluctance to take on much risk on Wednesday ahead of the Federal Reserve’s interest rate decision later in the day, although rising expectations of a 50 basis point cut should provide a some support to the markets.

As Asia’s first opportunity to react to the Fed is on Thursday, local events may move markets more on Wednesday. These include the Indonesian central bank’s rate decision, Japanese machinery orders and trade data and public comments from Philippine central bank governor and Reserve Bank of Australia deputy governor Brad Jones.

However, the backdrop to the day’s trading is the Fed. While rates futures market prices suggest the Fed will begin its policy easing cycle with a half-percentage point move, there are growing reasons to believe a less market-friendly quarter-point cut is more appropriate .

Indeed, some might argue that the Fed does not need to loosen policy at all at this point.

The Dow also rose to new all-time highs on Tuesday after official figures earlier in the day showed US retail sales in August were much stronger than expected. The positive surprise lifted the Atlanta Fed’s GDPNow model estimate of third-quarter real GDP growth to a new high of 3.0 percent.

This suggests that the US economy is doing well. In addition, US financial conditions are now the weakest since April 2022, according to Goldman Sachs, or November 2021, according to the Chicago Fed.

Fed figures released last week also showed US household net worth rose to another record high in the second quarter, while household debt as a share of GDP fell to a 23-year low .

Again, while the labor market is clearly flexing, there is little sign that the US consumer — and therefore growth in general — is in immediate danger.

Against this backdrop, the size and pace of rate cuts implied in the futures rate curve are extremely aggressive – nearly 120 bps in the three remaining meetings this year and 245 bps in total by the end of next year.

Could the markets be preparing for a decline? If signals from Chairman Powell’s press conference or the Fed’s new economic forecasts suggest that these lofty expectations may not be met, stocks, bonds and non-dollar currencies could retrace some of their recent gains.

The yen certainly bounced back on Tuesday, falling 1% against the dollar for its worst day in a month.

If the US economy appears to be humming along nicely, signals elsewhere are less encouraging – German investor sentiment and Canadian inflation numbers on Tuesday were weak, and data from China over the weekend was alarmingly weak.

Over to you, Jay Powell.

Here are the key developments that could provide more direction for Asian markets on Wednesday:

– The decision of the central bank of Indonesia

– Japan car orders (July)

– trade with Japan (August)