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While the Fed’s pause in its rate hike cycle will lead to stronger Asian currencies, recent gains in the region and disappointing Chinese economic data have divided observers on the growth outlook.
After the U.S. Federal Reserve raised interest rates last week in what was widely seen as its last move to bring inflation down, Asia-Pacific currencies cheered a potential pivot ahead as dollar index declined.
By early Monday in Asia, markets were pricing in a more than 90 percent chance of a pause at the Fed’s June meeting. CME’s FedWatch Tool It is guided by the fed funds futures contract. Traders saw less than a 10% chance of a 25 basis point hike.
A pause in rate hikes by the Federal Reserve could boost U.S. stocks, but its impact on growth in the Asian region may be less immediate.
“The Fed may be ‘done’ for now, but not all DM (developed market) central banks,” Manishi Raychaudhuri, head of equity research for Asia-Pacific at BNP Paribas, said in a note on Saturday.
“While a stable Asian currency could be good news for foreign inflows into Asian equities, in the short term, the quicksand of China’s economic landscape could be a stronger driver for Asian equities,” he wrote, pointing to the strong earnings season in Asia. Disappointed, every sector except consumer staples and technology fell short of consensus estimates.
Nomura equity strategists left their view on Asia-Pacific equities unchanged, maintaining their year-end target for MSCI Asia ex-Japan, despite the Fed’s likely pause in rate hikes. Nomura strategist Chetan Seth added that the risk of a U.S. recession looms, but the exact timing of the slowdown is hard to predict.
“Nevertheless, in our base case, we do not expect significant declines in Asian equities. Ultimately, we believe that any weakness in Asian equities will serve as an excuse for investors to increase their exposure to Asian equities amid fears of a U.S. recession. Opportunities, as local factors remain supportive,” Nomura strategists wrote in a note on Sunday.
UBS Global Wealth Management also pointed out that Asian central banks are finally getting rid of the pressure to keep up with the Fed’s interest rate hikes.
UBS said in its May monthly outlook report: “The peaking of US interest rates is a key turning point that should open the door for Asia to start easing policy, with some economies already having room to cut rates by 25-50 basis points.” South Korea, Central banks in Indonesia and India may shift to an easing cycle.
look at China
BNP Paribas’ Raychaudhuri added that investors in Asia were now focused on China’s “jagged” recovery after easing strict coronavirus restrictions.
“Asian investors are most worried about China,” he said, noting “the unsustainability of the rebound in consumption, especially against the backdrop of high youth unemployment.”
He noted that disappointing economic data had overshadowed numbers suggesting the economy was returning to normal.
“Sharp decline in China’s manufacturing PMI in April, soaring local government financing vehicle (LGFV) debt, persistent youth unemployment, falling real estate investment, and ongoing geopolitical pressure are overshadowing good news from China: Strong services PMI and record-breaking Golden Week tourist activity,” he said.
HSBC added that it believed part of the underperformance of Asian currencies was due to a lack of confidence in China.
“Confidence in mainland China remains weak – likely reflecting a lack of confidence in growth and geopolitical issues,” HSBC wrote in its May outlook report.
domestically centered
Societe Generale added that historically not all markets in the region rallied after the Fed came out of a rate hike cycle.
“The situation in Japan is a bit different, with the Topix falling an average of 1% during the last Fed rate hike-first rate cut,” a team of strategists led by Makhdoom Muteeb Raina wrote in a May 5 note.
“On a market-by-market basis across the region, we observed that markets associated with global growth—Japan, but also South Korea and Taiwan—underperformed more domestic markets—South Asia and China,” they wrote.