MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.44% at 525.40 points but hovering around a near seven-month high of 531.56 after a strong rally
Asian stocks dropped Wednesday in cautious trading ahead of a U.S. inflation data this week that could influence the timing of the Fed’s interest rate easing cycle, while the New Zealand dollar dropped after the central bank softened its hawkish stance.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.44% at 525.40 points but hovering around a near seven-month high of 531.56 after a strong rally. The index is 4.4% higher for the month, its strongest February performance in over a decade.
Asia’s tentative trading on Wednesday is likely to be reflected in Europe, with Eurostoxx 50 futures 0.12% lower, while German DAX futures were 0.06% higher.
Investor focus is now squarely on the PCE price index for January, the Federal Reserve’s preferred inflation gauge, due on Thursday.
A slew of strong economic data along with inflation that has proven to be stubborn has resulted in traders drastically cutting back their initial expectations of deep and early interest rate cuts from the Federal Reserve.
Markets now expect June to be the starting point of the easing cycle compared with March at the start of the year. Traders now expect 77 bps of cuts this year versus pricing in 150 bps of easing at the start of the year.
According to Yuting Shao, macro strategist at State Street Global Markets, individual data releases carry weight for a data-dependent Federal Reserve and will impact risk sentiment given the near-neutral positioning from investors.
Although one data point does not make a trend, latest inflation and employment readings have raised the prospect that perhaps no landing scenario is driving many asset markets, Shao added.
Other data due this week that could help shape expectations from the Federal Reserve include the second estimate of GDP, jobless claims and manufacturing activity.
Fed policymakers have also in recent days pushed back against reducing rates too early, with Governor Michelle Bowman on Tuesday saying she was in no hurry to cut U.S. interest rates, particularly given upside risks to inflation that could hinder progress or even cause a revival of price pressures.
