Fed Signals: High Rates Here to Stay, Markets Wobble

Asian stocks set to fall as traders adjust rate cut expectations, with Fed officials advocating for sustained high borrowing costs.

By Barry Stearns

5/16, 19:24 EDT
JP Morgan Chase & Co.

Key Takeaway

  • Asian stocks set to decline as traders adjust expectations for fewer Fed rate cuts in 2024, reflecting cautious market sentiment.
  • Treasury yields rise and the dollar strengthens amid speculation of higher borrowing costs and potential Bank of Japan rate hikes.
  • Federal Reserve officials and JPMorgan CEO Jamie Dimon signal a longer period of high interest rates due to persistent inflation.

Reassessment of Interest Rate Path

Asian stocks face early declines as traders reassess the trajectory of interest rates post-Wednesday's US inflation data. Equity futures for Japan and Australia are down, while Hong Kong shows a slight uptick. The retreat in US risk assets on Thursday, with the S&P 500 and Nasdaq 100 falling 0.2%, reflects a recalibration of Federal Reserve rate cut expectations in the swaps market. Swaps traders had initially priced in two cuts for 2024 post-inflation data but have now reverted to one cut fully priced in this year.

Treasury Yields and Dollar Strength

Treasuries saw a decline across the curve on Thursday, pushing yields higher to partially reverse previous moves. The 10-year yield rose by four basis points to 4.38%, supporting the greenback's strength. The yen remained stable after a slight dip on Thursday. Speculation from a former Bank of Japan chief economist suggests the possibility of three interest rate hikes this year, with the next as early as June, given the current accommodative policy stance.

Federal Reserve's Stance on Borrowing Costs

Three Federal Reserve officials advocate for maintaining high borrowing costs for a longer duration to monitor inflation trends closely. Cleveland Fed President Loretta Mester, New York Fed President John Williams, and Richmond Fed President Thomas Barkin believe that inflation may take more time to reach the 2% target. JPMorgan Chase & Co. CEO Jamie Dimon echoes concerns about persistent inflationary pressures, hinting at a prolonged period of elevated interest rates.

Asian Economic Data and Market Focus

In Asia, attention shifts to upcoming data releases, including home prices, industrial output, and retail sales for China, GDP figures for Malaysia and Hong Kong, and exports for Singapore. Reports suggest a potential plan in China to address excess property inventory, with key officials set to convene to discuss the strategy. Commodities show a positive trend, with West Texas Intermediate on a three-day rise, gold slightly up, and Bitcoin trading above $65,000 after a recent halt in its decline.

Street Views

  • Matt Maley, Miller Tabak + Co. (Neutral on the stock market):

    "There is a lot of leeway for the stock market if we do see a short-term pullback soon... Put another way, the bulls are still fully in charge right now, and so it will take a significant reversal to stem the tide of the upside momentum."

  • Jamie Dimon, JPMorgan Chase & Co. (Cautiously Optimistic on inflation and interest rates):

    "There are a lot of inflationary forces in front of us... The underlying inflation may not go away the way people expect it to."