Tech Rally Spurs Optimism Ahead of Fed's Inflation Verdict

Key Takeaway

• Asian markets optimistic, driven by US tech sector's growth amid easing inflation; Microsoft and Alphabet in focus.
• Traders eye Fed meeting for inflation insights, with Societe Generale warning against unexpected rate cut deviations.
• US Treasury sees largest drop since last February, with market adjusting rate-cut expectations and closely watching Fed's next moves.

Tech Focus Drives Market Optimism

Asian markets anticipate a positive start, with a spotlight on technology companies following a rally in US markets post an easing inflation reading. Tech giants like Microsoft and Alphabet have showcased the benefits of AI and cloud computing spending, aiding the sector's growth. Despite concerns over inflation and Middle East tensions, global stocks have seen a slight recovery, hinting at a potential turnaround in market sentiment.

Fed Meeting and Inflation Concerns

Traders await the Federal Reserve's policy meeting, with a focus on inflation trends and potential shifts in the central bank's stance. The recent rise in US consumer prices has raised expectations of a more hawkish Fed, leading to a reevaluation of rate-cut bets. Societe Generale economists suggest that any deviation from rate cut expectations could impact market dynamics, emphasizing the importance of Chair Powell's communication post the meeting.

Treasury Returns and Rate-Cut Expectations

US Treasury returns have witnessed a significant decline this month, marking the largest drop since February last year. Hawkish Fedspeak and robust economic data have tempered rate-cut expectations, with swaps traders now projecting only one Fed reduction for 2024, a stark contrast to initial estimates. The market's reaction to potential rate hikes or cuts will be closely monitored post the Fed meeting.

Market Movements and Currency Trends

Stock futures in Asia show a mixed picture, with gains in Australia and South Korea, while Hong Kong futures slipped. Currency movements reflect a relatively stable euro and Australian dollar, with the Japanese yen strengthening against the dollar. Cryptocurrencies remain steady, with Bitcoin hovering around $63,692.01 and Ether at $3,306.26.

Street Views

• Shane Oliver, AMP Ltd (Neutral on the market):

  "While the correction could be over, there is a significant risk that it’s just a bounce from oversold conditions... any further selloff is unlikely to be deep and stocks will see more gains as disinflation resumes, central banks ultimately cut interest rates and recession is avoided or proves mild."

• Societe Generale Economists including Klaus Baader (Neutral on US monetary policy):

  "With all measures of US consumer prices showing a steep acceleration over the past three to four months, the FOMC is bound to row back hard from its earlier predictions of meaningful policy easing this year... That said, markets have already scaled back pricing of rate cuts drastically, so unless Chair Powell plays up the possibility of rate hikes, the market damage is likely to be modest."