Asia market morning update - Fed patience

The broad picture, however, remains little changed amid the light volume we continue to expect into the end of the week.

‘Transitory’ inflation weakness

The latest Federal Open Market Committee (FOMC) meeting struck an arguably neutral tone despite the reaction we have witnessed overnight. Federal reserve chair Jerome Powell notably maintained that the Fed ‘don’t see a strong case for moving in either direction’ after assessing the solid economic activity, strong labour market and below-target inflation. This should not come as a surprise though the market had clearly been expecting a more dovish outlook and thus more equities-supportive rhetoric from the Fed. To some extent, the recognition of slowing growth to come had lifted the market’s bets of late on the possibility of a pre-emptive cut.

As said, the Fed meeting had yielded reactions otherwise wherein particular, the perception from Fed Powell on US inflation weakness being ‘transitory’ was seen as moderately hawkish by the market, leading to the drop in overnight markets. Prices were knocked out of the overbought territory on the S&P 500 index though supported above the 20 and 50-day moving average nonetheless. This had likewise seen to the paring back the likelihood of a rate cut to 53% on the CME Fedwatch tool from 66% prior to the meeting. All said, however, the biggest takeaway should remain that the Fed is expected to hold steady and likely through the rest of 2019, returning the focus to data performance.

Specifically, on a technical note, adjustment had been made to the interest rate on reserves (IOR) to 2.35% from 2.40% previously, a 5-basis points adjustment that is not entirely out of the market’s expectations and is broadly seen as a measure to contain the effective federal funds rate within range.

Asia open

Against the backdrop of the hawkish perception of the Fed, look to Asia markets to likewise experience pressure returning from the midweek holiday. Japan and Chinese markets remain away into the end of the week that would continue to make for light volume for the regions as the focus goes to data.

As noted from the session yesterday, Asia markets would also return to catch up to Apple’s earnings surprise with sales in China seen improving from the poor Q4 showing last year. The impact may however be blunted with the Fed reaction this morning. Besides this, a couple of releases are expected in the Asia region ahead of the Bank of England meeting conclusion for the day. The more market-moving items may however remain with both earnings and US payrolls into the end of the week after seeing the private ADP pre-empting a strong reading.

Amongst which to watch will also be US-China trade in the coming week after the rhetoric put through overnight for the expectation of a conclusion by the end of talks next week in Washington. A positive outcome would be one necessary for Asia markets to receive another boost, just as the opposite is expected to heavily weigh on the region.

Yesterday: S&P 500 -0.75%; DJIA -0.61%; DAX +0.13%; FTSE -0.44%