Asian markets dip on Middle East concerns despite Fed rate cut hopes

January 16, 2024 (MLN): Asian stocks ticked lower Tuesday as Middle East concerns overshadowed hopes for an early Federal Reserve interest rate cut, with traders now awaiting the release of key data out of China and the United States later in the week, as APP reported. 

With Wall Street closed Monday for a holiday, there were few catalysts to drive buying, while analysts warned investors might have overdone their optimism about how much the US central bank will loosen monetary policy this year, it added.

Equities soared at the end of 2023 as several reports showed inflation coming down and the jobs market softening while the Fed indicated that it was preparing to reverse more than a year of hiking, it further noted. 

Bets had been building that officials would announce a rate reduction as soon as March.

However, January has seen the wind come out of the sails after minutes from the central bank's December meeting showed decision-makers keen to keep rates elevated for some time, while a closely watched employment report smashed forecasts and consumer prices rose more than expected.

"The current market pricing indicates anticipation of nearly seven rate cuts in 2024, driven by the belief that the disinflation process is firmly entrenched and unlikely to be easily dislodged," said Stephen Innes at SPI Asset Management. 

It's essential to recall that the market consistently underestimated the Federal Reserve's willingness to raise rates during the hiking cycle.

So this prompts a straightforward question: Is the market now overestimating the Fed's readiness or capacity, particularly in the context of prevailing inflation dynamics, to implement rate cuts over the next 12 months?

While inflation is on a general downward path, there is a worry that it could pop back up anytime, particularly with tensions in the oil-rich Middle East showing no sign of calming.

Investors are now awaiting the release this week of US data on retail sales, industrial production and jobs, among other things.

Asian markets mostly fell Tuesday, with Tokyo suffering a small drop after six straight gains that saw the Nikkei burst to a 34-year high thanks to rising inflation and a weak yen that helps exporters.

Hong Kong was also in the red ahead of data on Chinese economic growth and retail sales due Wednesday. Shanghai was flat.

There were also losses in Sydney, Seoul, Singapore, Wellington, Taipei and Manila.

The weak performance followed losses in Europe that came after data showed the continent's biggest economy Germany shrank slightly in 2023 as costly energy, high interest rates and cooling foreign demand took their toll. 

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