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Asian shares drop, bonds bullish

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Investors also seemed to be betting that more the Fed delayed now, the more aggressive it would have to cut in the future given slowing inflation would sharply lift real rates

Asian shares dropped on Thursday as Wall Street took a late spill, while investors stuck to bets for cuts in U.S. interest rates in 2024 year even if the kick off might now be a little later than first hoped.

The Federal Reserve committee’s decision to hold rates at 5.25-5.5% on Wednesday was no surprise, it took a dovish twist by emphasising that rates would not be cut until it had more confidence that inflation was truly beaten.

In a media conference, Fed Chair Jerome Powell clearly stated a cut as early as March appeared unlikely, but also admitted that everyone on the committee was looking to ease this year.

One of the more dovish aspects of Powell’s remarks was the asymmetry on employment: strong employment gains won’t necessarily forestall rate cuts, but weak employment gains would ‘absolutely’ quicken rate cuts, wrote analysts at JPMorgan.

We are sticking with our call for a first cut in June, but after Powell’s remarks it is not hard to see a configuration of employment and inflation data that gets the Committee cutting by May, they added.

Indeed, markets actually doubled down on a May move, pricing in 32 bps of cuts – implying a 100% chance of 25 bps and some chance of a 50 bps easing.

We have pushed back our forecast of the first cut from March to May, said analysts at Goldman Sachs. Nevertheless, we continue to expect 5 cuts in 2024 and 3 more in 2025 because we expect core inflation to drop at least a couple of tenths below the Federal Open Market Committee’s median projection this year.

Investors also seemed to be betting that more the Fed delayed now, the more aggressive it would have to cut in the future given slowing inflation would sharply lift real rates.

As a result, Fed fund futures for December have priced in a further 13 bps of easing this year taking the total expected to 143 bps.

Likewise, Treasuries rallied strongly as 10-year yields dipped 12 bps to 3.91% in the wake of the Fed decision. Some of those gains were then cut in Asia, nudging yields up to 3.950%.

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