Asian stocks experienced a slight decline on Wednesday in cautious trading ahead of a key U.S. inflation report that could impact the Federal Reserve’s plans for monetary policy. The New Zealand dollar also fell after the country’s central bank adopted a less hawkish stance.
The MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.44% at 525.40 points, though it remained near a seven-month peak of 531.56 after a strong rally. The index has gained 4.4% for the month, marking its strongest February performance in over a decade.
Market sentiment in Asia is expected to be reflected in Europe, with Eurostoxx 50 futures down 0.12% and German DAX futures up 0.06%.
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Investors are closely watching the personal consumption expenditures price index (PCE) for January, the Fed’s preferred inflation measure, which is due on Thursday. The PCE is expected to show a 0.3% increase on a monthly basis in January, slightly up from the 0.2% rise in December.
Recent strong economic data and persistent inflation have led traders to revise their expectations for early and deep interest rate cuts by the Fed.
The easing cycle is now anticipated to start in June, compared to initial expectations for March at the beginning of the year. Traders now expect a total of 77 basis points of rate cuts this year, down from 150 bps at the start of the year.
Yuting Shao, macro strategist at State Street Global Markets, noted that individual data releases hold significance for a data-dependent Fed and will impact risk sentiment, especially given investors’ near-neutral positioning.
While a single data point does not establish a trend, recent inflation and employment data have raised the possibility that the Fed may not need to implement aggressive rate cuts, influencing various asset markets.
Additional data scheduled for release this week, such as the second GDP estimate, jobless claims, and manufacturing activity, could further shape expectations regarding Fed policy.
Some Fed policymakers have also cautioned against premature rate cuts, with Governor Michelle Bowman stating on Tuesday that she was not in a hurry to lower U.S. interest rates, particularly considering potential upside risks to inflation that could hinder progress or even lead to a resurgence of inflationary pressures.
