Asian stocks ease as traders reassess Fed rate cut bets

Singapore — Asian shares fell on Thursday and the dollar was near a three-week high as traders dialled back bets of steep and early rate cuts this year, with the minutes of the Federal Reserve’s last meeting providing few clues on when US cuts might start.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.17% and was headed for the third straight day of losses in a sobering start to the year at 0611 GMT. Japan’s Nikkei slipped 0.5% on its first trading day of the year.

In Europe, futures indicated a mixed opening for markets. Eurostoxx 50 futures were down 0.04%, German DAX futures eased 0.07% and FTSE futures added 0.08%.

Minutes of the Fed’s December 12-13 meeting released on Wednesday showed a growing sense among policymakers that inflation was under control and raised concerns about the risks of “overly restrictive” monetary policy on the economy.

“The Fed minutes suggest that many members endorsed the ‘higher rates for longer’ narrative, while those that projected rate cuts in 2024 viewed cuts coming later in the year,” said Quincy Krosby, chief global strategist for LPL Financial.

Krosby said in an email the minutes underscored an “uncertain” policy path, suggesting expectations for a rate cut in March may need to be ratcheted down further.

Markets are now pricing in a 70% chance of the Fed cutting rates in March compared to 90% a week earlier, according to CME FedWatch tool.

Investors have also slightly lowered their expectations for the year, with futures pricing showing less than 150 basis points (bps) of easing anticipated this year vs 160 bps last week.

Goldman Sachs analysts, though, still expect the first rate cut in March and five total cuts in the year, calling the comments in the minutes dovish.

“We think it is already clear that inflation is moving down sustainably … the comment implies that once this threshold is met, the policy rate should no longer be restrictive, not just that cuts should begin,” they said in a note to clients.

Fed officials in December predicted 75 bps of rate cuts in 2024, driving money-market bets for about double that amount and spurring a year-end rally in stocks and bonds.

Richmond Federal Reserve president Thomas Barkin said on Wednesday the US central bank was “making real progress” towards taming inflation without inflicting major damage on the job market, with a hoped-for soft landing “increasingly conceivable”.