Fed’s hawkish cut negatively impacts markets, followed by BOJ

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

The Federal Reserve has spoken, and as far as investors are concerned, the message was clear – clearly aggressive. Now it’s the turn of the Bank of Japan and the Bank of England, the two biggest and most important central bank policy decisions on Thursday.

This recent burst of central bank meetings is culminating with decisions also coming from Norway and Sweden on Thursday, and, more importantly from an Asian perspective, Taiwan and the Philippines.

Investors in Asia are on the defensive on Thursday after the Fed cut rates by a quarter of a percentage point, as expected, but announced a slower pace of easing.

Fed officials raised their average projection of where they see neutral long-term rates, significantly raising their inflation outlook for 2025 and continuing to chart a path of further rate cuts next year.

Higher inflation combined with continued easing is a cycle that Fed Chairman Jerome Powell had difficulty with at his press conference. And as he spoke to reporters, the sell-off in stocks and government bonds accelerated and the dollar rose even higher.

Wall Street ended the day sharply lower. The Nasdaq fell more than 3%, the Dow Jones fell for a tenth day – its longest losing streak in fifty years – the dollar jumped to a two-year high and bond yields rose across the curve.

As Dan Siluk of Janus Henderson noted, there is potential for an “extended pause” next year, with the Fed indicating that “we are in a structurally higher inflation and interest rate environment.”

Emerging market assets will almost certainly come under heavy pressure on Thursday.

All eyes in Asia are now on Tokyo. The BOJ is expected to leave interest rates unchanged, leaving investors to be guided by Governor Kazuo Ueda’s comments during his press conference.

Japan’s swap rate implies a 60% probability that the BOJ will raise rates by 25 basis points in January, up from around 70% a few weeks ago. A quarter-point increase won’t be fully priced until May, and only a total tightening of 45 basis points is expected by December, the swap curve shows.

The Philippine central bank is expected to cut its key policy rate by a quarter of a percentage point to 5.75% as inflation is under control and the economy weakens, according to a Reuters poll.

Although inflation rose for the second month to 2.5% in November, it remains well within the central bank’s target of 2%-4%. This would be the third cut in a row, and economists expect three more cuts next year.

Policymakers in Taiwan, meanwhile, are expected to keep the policy rate unchanged at 2% and maintain it at that level throughout the year, given strong concerns about the economy and inflation.

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