By Wayne Cole
SYDNEY (Reuters) – Asian shares opened cautiously on Monday in a week that is almost certain to see the start of a U.S. easing cycle, with the only question mark being the size of the cuts as markets were divided over the likelihood of a major move.
Central banks in Japan and the UK also meet this week and are expected to remain on hold for now, while a busy data schedule includes US retail sales and industrial production.
The geopolitical landscape has been clouded more than ever as Republican presidential candidate Donald Trump was the target of a second assassination attempt on Sunday, according to the FBI.
Economic conditions in China, Japan, South Korea and Indonesia were weak, and early moves were modest. MSCI’s broadest index of Asia-Pacific shares outside Japan was almost flat, after rising 0.8% last week.
US Nasdaq futures closed at 36,490 points compared with a cash close of 36,581 points as the yen’s recent gains weighed on exporters. Nasdaq futures were also slightly higher.
Economic data out of China over the weekend disappointed, with industrial output growth slowing to a five-month low in August, while retail sales and new home prices weakened further.
“The data reinforces the case for the need for additional economic stimulus by the end of the year if China is to achieve its target of growth of around 5% in 2024,” said Vivek Dhar, mining and energy analyst at Commonwealth Bank of Australia.
“We believe policymakers will seek to boost central government spending on infrastructure projects if China’s real estate and infrastructure sectors weaken again in September.”
Futures are pointing to a 52% chance that the Fed will cut rates by 50 basis points on Wednesday, with odds narrowing sharply after media reports revived the prospect of more aggressive easing.
“We agree that the decision is likely to be close, but we also think the Fed will do the ‘right’ thing and raise rates by 50 basis points,” said Michael Feroli, an economist at JPMorgan.
“The case for a 50 basis point rate cut seems clear to us: the various iterations of the Taylor rule mean that current policy is too constrained by a full percentage point or more,” he added.
If the Fed decides to cut rates by half a basis point, Feroli expects policymakers to also expect cuts of 100 basis points this year and 150 basis points by 2025.
The market expects 114 basis points of easing by Christmas and another 142 basis points next year.
Yen on a roll
Analysts at ANZ noted that in the past three decades there have been three easing cycles that began with cuts of more than 25 basis points, but in each there were concerns about market deterioration leading to a recession, which is no longer the case now.
The prospect of an aggressive move sent bonds broadly higher, with the yield on the 2-year Treasury note falling to 3.593% after hitting its lowest close since September 2022.
The Bank of England is generally expected to leave interest rates unchanged at 5.00% when it meets on Thursday, although markets have priced in a 31% chance of another cut.
The Bank of Japan is scheduled to meet on Friday and is widely expected to keep monetary policy unchanged, although it may lay the groundwork for further tightening in October.
South Africa’s central bank is also expected to ease monetary policy this week, while Norway’s is expected to hold steady.
A drop in Treasury yields boosted the yen against the dollar, to 140.82 yen after it fell 0.9% last week to a near nine-month low. (USD/)
The euro held steady at $1.1086, with the prospect of further interest rate cuts by the European Central Bank keeping the currency at $1.1200.
The Canadian dollar held steady at 1.3580 against the US dollar after Bank of Canada Governor Tiff Macklem opened the door to accelerating interest rate cuts in an interview with the Financial Times.
Gold was supported by lower bond yields, with the price reaching $2,579 per ounce and approaching an all-time high of $2,585.99.
Oil prices rose as about a fifth of crude oil production in the Gulf of Mexico was shut down.
The price of a barrel of US West Texas Intermediate crude oil rose 19 cents to $71.78, while it rose 28 cents to $68.93.