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Asian shares drop, yen firm as BOJ considers positive rates

shares drop

Recent data revealed that Japan’s economy was not in a recession, as economic growth was revised up to an annualized rate of 0.4% for the December quarter

Asian stock markets struggled on Monday, with the dollar appearing weak as investors awaited the U.S. inflation data that could impact the timing of global interest rate cuts.

The yen saw a slight increase, with reports from Reuters indicating that more Bank of Japan policymakers are considering ending negative rates this month due to expectations of significant pay raises during this year’s wage negotiations.

Recent data revealed that Japan’s economy was not in a recession, as economic growth was revised up to an annualized rate of 0.4% for the December quarter.

The upcoming U.S. consumer price index (CPI) report for February is expected to show a 0.4% increase for the month, maintaining the annual rate at 3.1%. Core inflation is projected to rise by 0.3%, bringing the annual rate down to 3.7%, the lowest since early 2021.

The potential decrease in core inflation aligns with the softer conditions observed in the February payrolls report, where unemployment reached a two-year high of 3.9%, indicating a high probability of rate cuts by the Federal Reserve in the coming months.

We continue to expect four 25 bps cuts in the Fed funds rate this year, starting in June, analysts at Goldman Sachs wrote in a note. Nonetheless, the weak employment report increases the odds that the FOMC begins the easing cycle in May instead.

We expect that developed market central banks will lower policy rates by 128bp on average over the next 12 months, they added. We also expect that emerging market central banks will cut rates by 190bp on average.

Market futures suggest a 30% probability of a Fed rate cut in May and a 70% chance of the first move in June.

Chinese inflation data released over the weekend showed a positive uptick to 0.7% in February, although producer prices continued to experience deflation.

Beijing also promised to improve home sales in a “forceful” and “orderly” way to support the country’s beleaguered residential property market, but was short on details.

Expectations of reduced borrowing have provided a boost for stocks, as MSCI’s index of Asia-Pacific shares excluding Japan dipped by 0.1% following an eight-month high on Friday. The Nikkei in Japan fell by 2.3% after reaching a series of record highs last week. Chinese blue chips saw a modest increase of 0.2%, albeit lacking strong conviction.

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