Asian shares firmer after Fed’s disinflation comments

Singapore — Asian equities jumped, while the dollar was on the back foot on Wednesday after less hawkish than feared comments from Federal Reserve chair Jerome Powell lifted sentiment and fuelled investor hopes that the central bank may soon ease monetary policy.

In an eagerly awaited speech earlier on Tuesday, Powell reiterated that disinflation has begun but warned Friday’s eye-popping jobs report showed why the battle against inflation will “take quite a bit of time.”

Those jobs figures showed a surprising addition of 517,000 new jobs in January, stoking the fear that the tight labour market may compel the Fed to remain hawkish.

“It didn’t take much for markets to re-find their mojo after last Friday’s payrolls shock, just a speech from Fed chair Powell, at which he was not materially more hawkish than he was after the recent FOMC [Federal open market committee] decision,” said Rob Carnell, ING regional head of research for Asia-Pacific.

Last week, the Fed raised interest rates by 25 basis points (bps) and said it had turned a key corner in the fight against high inflation but projected “ongoing increases” in borrowing costs would be needed.

Powell’s comments on Tuesday that the economy would need more interest rate rises to keep inflation on a consistent downward track was not really a deviation from what had already been said, Carnell noted. “And equity markets saw that as an excuse to rally.”

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.7% higher. The index is up about 8% for the year after shedding nearly 20% in 2022. Japan’s Nikkei was 0.69% lower, while Australia’s S&P/ASX 200 index rose 0.35%.

Futures indicated the exuberant mood looked set to continue in Europe, with the Eurostoxx 50 futures up 1.07%, German DAX futures 1.01% higher and FTSE futures up 0.59%.

Markets are pricing in a terminal rate of over 5% in June but anticipate the central bank to cut interest rates by the end of the year.

Investors will parse though data before the Fed next meets in March to gauge where the economy is headed.

“There’s always the danger in reacting too much to data and Powell seems to be aware of that,” said Shane Oliver, head of investment strategy for AMP Capital in Sydney. “I am left with the impression that they will probably raise interest rates in March and then it gets 50-50 after that.”

Oliver said as the year proceeds, the focus for markets will shift from sticky inflation and elevated interest rates to the extent of the slowdown in economy and its impact on profits.

“But at the moment, the market’s a little hopeful that the Fed is getting close to the top and the recession might be avoided leading to a bit of relief rally,” he said, cautioning there may be a bit of pullback in February.

Meanwhile, China’s shares fell 0.2% and Hong Kong’s Hang Seng index was 0.06% lower as US-China balloon spat simmered and as some investors took profits after recent gains.

US President Joe Biden in his state of the union speech challenged Republicans to lift the US debt ceiling and support tax policies that were friendlier to middle class Americans.

Assailing oil companies for making high profits and corporate America for taking advantage of consumers, Biden used his prime time speech to outline progressive priorities of his Democratic Party that are anathema to many Republican legislators.

E-mini futures for the S&P 500 were barely moved.

In the currency market, the dollar pulled back a bit after the speech. The dollar index, which measures the US currency against six major rivals, was at 103.29, having dropped to as low as 102.99 in the previous session.

The Japanese yen was flat at ¥131.08 to the dollar, after surging 1.2% in the previous session.

Oil prices were little changed on Wednesday, after gaining in the previous two days, with Brent crude at $83.66, down 0.04% on the day, after jumping 3.3% in the previous session.

US West Texas Intermediate (WTI) crude futures rose 0.17% to $77.27 a barrel, after jumping 4.1% in the previous session.

Reuters