Asian Stocks Ease Amid Fed Chair’s Hawkish Comments; Dollar Firms

Asian stocks dipped near two-and-a-half-year highs on Tuesday, while the U.S. dollar strengthened following hawkish remarks by Federal Reserve Chair Jerome Powell, which dampened hopes for significant interest rate cuts. Additionally, rising tensions in the Middle East contributed to a cautious risk sentiment among investors.

Market Overview

• MSCI’s Broadest Asia-Pacific Index: The index of Asia-Pacific shares outside Japan declined by 0.13% to 620.05 on Tuesday, just below Monday’s peak of 627.66, a level not seen in two and a half years. Despite this slight dip, the index remains up 17% for the year.
• Japan’s Nikkei: Japan’s Nikkei climbed 1.5% in early trading, rebounding from Monday’s 4.8% drop after Shigeru Ishiba, a perceived monetary policy hawk, won the race to become Japan’s prime minister. Japanese shares were supported by a softer yen, trading at 144.09 per dollar.

Chinese Markets Take a Pause

With mainland China’s financial markets closed for the rest of the week, the rally that has boosted Asian markets is expected to take a break. The Hong Kong Hang Seng index is also closed on Tuesday. Recently, a series of stimulus measures propelled beaten-down Chinese stocks, with the blue-chip CSI300 surging 25% since the beginning of last week.

Fed Rate Cut Expectations Adjust

Investors are closely watching the Federal Reserve’s approach to rate cuts after last month’s 50 basis-point reduction. Chair Powell indicated on Monday that the central bank might stick to quarter-percentage-point cuts, following positive data on economic growth and consumer spending.

• Traders now see a 38% chance of a 50 bp rate cut next month, compared to 53% last Friday, according to the CME FedWatch tool.
• Expectations of a total of 70 bps of easing this year remain.

Currency and Commodities Update

• U.S. Dollar: The dollar index edged up to 100.77, while the euro held steady at $1.11355.
• Oil Prices: Oil prices remained stable on Tuesday, balancing concerns over a potential supply disruption due to the Middle East conflict against the prospect of additional supply amid tepid global demand growth.
• Gold: Gold traded just below the record high reached last week as investors awaited U.S. labor data for further insight into the pace of rate cuts.

Upcoming Data to Watch

Given the Fed’s emphasis on the labor market, Tuesday’s job openings data for August and the ISM manufacturing survey for September will be closely monitored, as these figures will influence rate expectations and currency movements.