Bonds cheer Fed talk of cuts; Kiwi flies

Pedestrians walk in front of an electronic board displaying the Nikkei stock average, outside a brokerage firm in Tokyo, Japan, October 31, 2023. REUTERS/Kim Kyung-hoon/File Image gets license rights

SINGAPORE (Reuters) – Asian stocks briefly hit a one-week high on Wednesday, bonds rose and the dollar fell on fresh hints of a U.S. interest rate cut, while the New Zealand dollar jumped after the central bank said another rate hike may be necessary. If inflation proves stubborn.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) rose 0.5% in early trading before weakness in Hong Kong technology stocks pulled it back to stability.

Japan’s Nikkei (.N225) fell 0.2%. In the latest trading, the New Zealand dollar rose 1.1% to the highest level in four months at 0.6207 US dollars, after exceeding the resistance level.

Meanwhile, the US dollar fell to multi-month lows against the euro, yen, British pound, Australian dollar, yuan and Swiss franc. Gold recorded its highest level in seven months, above $2,051 per ounce.

Overnight, Federal Reserve Governor Christopher Waller — an influential and formerly hawkish voice at the US central bank — told the American Enterprise Institute that interest rate cuts could begin within months, provided inflation continues to fall.

Fed funds futures rose on this statement to price in more than a hundred basis points of cuts in 2024 and a 40% probability of them starting as soon as March. Two-year Treasury yields fell sharply, and the dollar fell further in Asia.

“The market moved clearly after Governor Waller opened up the possibility of cuts,” said Tapas Strickland, head of market economics at National Australia Bank in Sydney. Waller’s comments echoed previous comments made by Federal Reserve Chairman Jerome Powell.

The two-year yield reached its lowest level since mid-July at 4.70%, and the benchmark 10-year yield fell by 4 basis points to its lowest level since September at 4.30%.

The dollar fell in recent transactions by 0.5 percent to 146.68 yen, its lowest level since September 12, and a decline of about 2 percent in three days. It touched the lowest level in three and a half months at $1.1017 per euro.

Waller said that if inflation continues to fall “for a few more months…three months, four months, five months…we can start cutting interest rates just because inflation is lower.”

“There’s no reason to say we’re going to keep the rate really high,” he said.

Conditionality

Waller’s comments continue a two-week surge in stocks and bonds around the world since the release of the benign US inflation report two weeks ago – with the exception of China where doubts about the economy have left investors feeling pessimistic.

Global stocks (.MIWD00000PUS) rose nearly 9% in November and are on track for their best month in three years. The Hang Seng Index (.HSI) is stable and has not recorded a positive month since July.

The latest negative news came from Meituan (3690.HK) which pointed to slower growth in the fourth quarter for its core food delivery business. Shares fell 8% to a 3-1/2-year low on Wednesday, despite the company’s promise of a $1 billion buyback.

The Hang Seng Index fell 0.9% on Wednesday. Mainland blue chips (.CSI300) fell 0.4% and are on track for a fourth straight monthly decline with a 1.9% decline in November.

Some analysts are also concerned that markets have been swayed by parts of Fed officials’ comments – suggesting possible interest rate cuts – although the comments were conditional on further declines in inflation and financial conditions remaining tight.

New Zealand sounded a note of caution on Wednesday when the central bank raised its interest rate forecasts slightly and warned the hikes may not be over.

Economist Vishnu Varathan of Mizuho said: “Bets should be guided by the condition that policy is appropriately hawkish, and not indulge in abandoning overconfidence that the Fed has done so (based on linear expectations of lowering inflation).”

Elsewhere, Australian inflation fell more than expected. In commodities, Brent crude futures settled at $81.75 per barrel but were heading for a monthly decline, while Singapore iron ore futures rose 9.6% in November at $130.50 per tonne.

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