Morning Bid: Fed’s close call – the waiting is almost over

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 some support to markets.

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

The backdrop to the day’s trading, however, is the Fed. While rate futures market pricing suggests the Fed will begin its policy easing cycle with a half percentage point move, there are mounting reasons to believe a less market-friendly quarter point cut is more appropriate.

Indeed, some might say the Fed doesn’t need to be loosening policy at all right now.

The S&P 500 and Dow on Tuesday rose to new all-time highs, after official figures earlier in the day showed U.S. retail sales in August were a lot stronger than expected. The upside surprise lifted the Atlanta Fed’s GDPNow model estimate of real GDP growth in the third quarter to a new high of 3.0%. 

This suggests the U.S. economy is doing just fine. On top of that, U.S. financial conditions now are the loosest since April 2022, according to Goldman Sachs, or November 2021, according to the Chicago Fed. 

Fed figures published last week also showed U.S. household net worth rose to another record high in the second quarter, while household debt as a share of GDP fell to its lowest in 23 years.

Again, while the labor market is clearly softening there is little sign that the U.S. consumer – and therefore, growth at large – is in immediate peril. 

In that context, the size and pace of rate cuts implied in the rate futures curve is extremely aggressive – nearly 120 bps over the three meetings left this year, and 245 bps in total by the end of next year.

Could markets be setting themselves up for a fall? If signals from Chair Powell’s press conference or the Fed’s new economic projections suggest these lofty expectations might not be met, stocks, bonds and non-dollar currencies may retrace some of their recent gains.

The yen certainly recoiled on Tuesday, slumping 1% against the dollar for its worst day in a month. 

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

Over to you, Jay Powell.

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

– Indonesia central bank decision

– Japan machinery orders (July)

– Japan trade (August)