Asian stock markets fell on Monday, echoing Wall Street's trends. With U.S. inflation data on the horizon, the dollar stands on shaky ground, as this data could sway global interest rates in one direction or another.
The yen got stronger as the latest data revealed that Japan's economy isn't in a slump, but has instead grown slightly with a 0.4 percent annual rise in the last quarter of the previous year. Many from the Bank of Japan are considering stopping the negative interest rates this March, in hopes of big wage increments this year.
The U.S. Consumer Price Index (CPI) predictions for February indicate a monthly increase of 0.4 percent, maintaining an annual rate of 3.1 percent. The prediction is for core inflation, which leaves out unpredictable factors like food and energy, to go up by 0.3 percent. This small increase will take the yearly rate to a level not witnessed since early 2021, which is 3.7 percent.
Global markets react to softening economic indicators
The weaker core conditions are in line with the softer numbers from the February jobs report, where unemployment reached a two-year high at 3.9 percent. Given these conditions, it appears the Federal Reserve may reduce interest rates soon.
Experts at Goldman Sachs predict four rate cuts of 0.25% by the Federal Reserve this year, starting in June. They point to a weak jobs report, suggesting the Federal Reserve may begin reducing rates as early as May.
Furthermore, they forecasted an average policy rate reduction of 128bp by developed market central banks over the next 12 months. In addition, they projected that emerging market central banks are likely to slash rates by an average of 190bp. There's approximately a 30% likelihood of the Fed reducing rates in May, and a high probability of 70% for the first reduction happening in June.
Price data from China over the weekend revealed a promising rise in inflation to 0.7 percent in February, however, producer prices continue to be trapped in deflation. Beijing also pledged to boost home sales to aid the country's struggling residential property market but did not provide specific details.
Optimism about reduced loan rates had previously boosted stock values, with MSCI's comprehensive index of Asia-Pacific shares outside Japan dipping by 0.3% following an eight-month high achieved last Friday. However, Japan's Nikkei fell by 1.2% after marking its highest peaks successively last week.
Tech slump, bond strength, and Yen's rise
The S&P 500 futures and Nasdaq futures both saw a slight decrease, following profit-taking actions on Friday. This was largely attributed to a 5.6 percent loss by tech leader Nvidia. Meanwhile, Treasury bonds maintained their upward trend thanks to the pleasant jobs report. The 10-year yields even reached a one-month low point of 4.038 percent, and were last quoted at 4.08 percent.
The decrease in returns has weakened the dollar, particularly against the yen. This is due to market predictions that the Bank of Japan might terminate its policy of negative interest rates and controlling the yield curve this month.
Paul Robson, head of G10 FX strategy at NatWest Markets, shared an intriguing insight. He expects the Japanese Yen to gain strength in the tactical short-covering leading up to the Bank of Japan meeting on March 18/19. He believes this meeting could lead to a change in Yield Curve Control (YCC) and Negative Interest Rate Policy (NIRP), and recent higher inflation readings reinforce this conviction. So, from a tactical perspective, he advises being long on JPY.
The dollar reduced to 146.84 yen, dropping 2% last week to a five-week low of 146.48. The euro held steady at $1.0939, after rising 0.9% last week to reach $1.0980. The dip in the dollar and bond yields has benefited gold which capsized at $2,180 an ounce, after spiking 4.5% last week to all-time highs.
Oil prices are struggling due to concerns about China's demand, despite supply reductions by the producer group OPEC+.