Asian Stocks Steady, Dollar Flat as Markets Eye Potential Larger Fed Rate Cut

Asian stocks opened cautiously on Monday, with investors closely watching the Federal Reserve's upcoming decision on interest rates. Market sentiment shifted toward the possibility of a larger rate cut, with futures reflecting increased odds of a 50-basis-point reduction.

Asian Stocks Open Cautiously as Markets Await Fed’s Rate Decision and Central Bank Meetings

In a week that is almost certain to witness the commencement of an easing cycle in the United States, Asian stocks made a cautious start on September 16. The only uncertainty is the size of the reduction, with markets divided on the likelihood of an outsized move.

Japan's and the United Kingdom's central banks are also scheduled to convene this week. Both are anticipated to maintain their current stance. The United States' industrial production and retail sales are also featured on a busy data schedule.

The FBI reported that Republican presidential candidate Donald Trump was the target of a second assassination attempt on September 15, underscoring the continued significance of geopolitics.

The initial movements were modest due to the thin conditions that resulted from holidays in China, Japan, South Korea, and Indonesia. After experiencing a 0.8% increase in the previous week, MSCI's broadest index of Asia-Pacific shares outside Japan was virtually unchanged.

Futures traded at 36,315 compared to a cash close of 36,581 even though Japan's Nikkei was closed. Exporters were under pressure from recent yen gains. Nasdaq futures experienced a 0.1% decline, while S&P 500 futures remained relatively unchanged.

The EURO STOXX 50 futures and FTSE futures were slightly firmer.

The economic data from China over the weekend was disappointing. In August, industrial output growth stalled to a five-month low, and retail sales and new home prices declined.

"The data bolsters the case for additional economic stimulus by year-end if China wants to achieve its target of around 5% growth in 2024," said Vivek Dhar, a mining & energy analyst at CBA.

"We think policymakers will look to boost central government spending on infrastructure projects if both China's property and infrastructure sectors sink again in September."

Markets Lean Toward Larger Fed Rate Cut as Odds of 50bp Reduction Rise Sharply

According to Reuters, the Federal Reserve, futures experienced an early rally, which increased the probability of a half-point reduction to 59%, compared to 30% a week ago. The odds have shrunk significantly after media reports revived the prospect of more aggressive easing.

“We agree it is likely to be a close call, but we also believe the Fed will make the 'right' move and go 50bp," said JPMorgan economist Michael Feroli.

"The case for a 50bp cut seems clear to us: various iterations of a Taylor Rule imply policy is currently a full percentage point or more too restrictive," he added.

Feroli anticipates that policymakers will also anticipate 100 basis points of reductions this year and 150 basis points in 2025 if the Fed does reduce rates by half a point.

By Christmas, the market has factored in 114 basis points of easing, with an additional 142 basis points anticipated for the following year.