Rate cuts on the horizon, signaled by markets today

Asian Stocks Rise on Expectations of Rate Cuts

Asian stocks have increased while the dollar has lost momentum on expectations of a rate cut by the Federal Reserve this year, with US inflation data expected in a few days likely indicating a easing of price pressures.

Market Outlook

Investors are gearing up for an interesting week in terms of macro data, which could set the stage for a European rate cut as early as next week and a US policy easing within a few months.

In this atmosphere of anticipation and positive sentiment, stock markets in Hong Kong, China, Australia, South Korea, and Japan have advanced, while US stock futures remained largely unchanged.
The Australian dollar, euro, and yen have slightly strengthened against the greenback.

Market Drivers

The prospect of a decrease in the cost of money in the major global economies, Eurozone and the USA, remains the primary driver of markets in recent weeks.

Investor Sentiment and Expectations

Global investors hope that the Fed, along with the European Central Bank and its counterparts, will cut interest rates this year.
This, coupled with strong corporate earnings and signals from US officials that further rate hikes are unlikely, has bolstered sentiment in global markets.

Edward Ng, senior portfolio manager at Nikko Asset Management Asia Ltd., stated, “Markets continue to consolidate as global investors remain attentive to signals of the US economic health and the likely monetary path of the Fed.”

Inflation and Central Bank Policies

The Fed’s preferred measure of underlying inflation will be released on Friday and is expected to show modest relief.

It is estimated that the ECB will cut rates for the first time since concluding an unprecedented tightening campaign at the June 6 meeting.
Policymakers Piero Cipollone and Fabio Panetta have both signaled an imminent reduction over the weekend, with markets pricing an 88% probability of easing to 3.75% on June 6.

The chief economist at Eurotwer told the Financial Times that the central bank is ready to start cutting, but policy will still need to be restrictive this year.

Divergence Between ECB and Fed

US officials, however, are moving towards a turnaround at a slower pace, with Fed Chairman Jerome Powell emphasizing the need for further evidence that inflation is on a sustained path toward the 2% target before lowering the policy benchmark.

The divergence between the ECB and Fed could create market imbalances, especially in the currency sector.

Industrial Profits in China

Meanwhile, contributing to boosting sentiment, profits of Chinese industrial firms increased in April, as shown by Monday’s data, while the government’s push for equipment upgrades has boosted demand and exports have resumed growth.

A global cyclical boom in technological products like chips, as well as the Chinese government’s effort to persuade companies to replace their old equipment, have likely supported the recovery.