Asian shares soared to their highest levels in three weeks on Wednesday, supported by a strong rally in technology stocks, while the dollar experienced volatility following weak U.S. retail sales data that bolstered expectations for a Federal Reserve rate cut later this year. MSCI‘s broadest index of Asia-Pacific shares outside Japan climbed 0.72%, with tech stocks in the region up 1.6% at a record high. Japan’s Nikkei rose 0.59%, while blue-chip stocks in China fell 0.42%. Hong Kong’s Hang Seng index gained 1.3%.
Tuesday’s data revealed U.S. retail sales barely increased in May, with the previous month’s data revised significantly lower, indicating sluggish economic activity in the second quarter. This prompted a slight increase in rate cut expectations for September, with traders now pricing in a 67% chance of easing, up from 61% the previous day, according to the CME FedWatch tool. Markets are currently anticipating 48 basis points of cuts this year.
Vasu Menon, managing director of investment strategy at OCBC, cautioned that the Fed would require more data to support a rate cut decision, advising investors not to overreact to one or two data points. Last week’s mild U.S. inflation readings contrasted with a generally hawkish stance by Fed officials, who reduced their previous median projection for three quarter-point rate cuts this year to one.
Menon noted that while rate cuts are a more significant story for 2025, there is optimism that they will occur more substantially over the next two years, even if 2024 remains uncertain. This hope is likely to keep markets buoyant. Fed officials, encouraged by recent data, are seeking further confirmation that inflation is cooling while monitoring potential warning signs from a still-robust labor market. Most expect one or two interest rate cuts by the end of this year.
The S&P 500 and Nasdaq closed at record highs on Tuesday, with Nvidia surpassing Microsoft to become the world’s most valuable company. With U.S. markets closed on Wednesday, trading is expected to be subdued.
In currency markets, the dollar index, which measures the U.S. unit against six rivals, stood at 105.29, while the euro steadied at $1.0738. The euro has been under pressure after French President Emmanuel Macron called for a snap election following a defeat of his ruling centrist party in the European Parliament elections.
Sterling remained flat at $1.2704 ahead of UK inflation data due later in the day, which will set the stage for the Bank of England’s policy decision on Thursday. The central bank is widely expected to maintain its current rates. The report is anticipated to show that Britain’s inflation rate fell back to the BoE’s 2% target in May from 2.3% in April.
Kyle Chapman, an FX markets analyst at Ballinger Group, stated that Wednesday’s inflation report would be crucial, and a rate cut could still be considered if services inflation improves. He emphasized that more evidence would be needed to convince the BoE of a sustained downward trend.
In Asia, the Japanese yen remained relatively unchanged at 157.83 per dollar, close to the six-week low of 158.255 touched last week. The currency continues to be pressured by the significant interest rate differential between Japan and the United States. Minutes from the Bank of Japan’s April policy meeting revealed that policymakers discussed the impact of a weak yen on prices, with some considering the possibility of raising interest rates sooner than expected if inflation overshoots.
In commodities, oil prices fluctuated as concerns over escalating conflicts between Russia and Ukraine, and tensions in the Middle East offset demand worries following an unexpected increase in U.S. crude inventories.
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