Asian shares experienced subdued trading on Thursday, reflecting investor caution as fresh U.S. data showed stalled progress in lowering inflation. While the U.S. economy displayed resilience, uncertainty over the Federal Reserve’s monetary policy for 2025 kept traders hesitant. The Thanksgiving holiday in the U.S. further contributed to thinner trading volumes, dampening market activity.
MSCI’s broadest index of Asia-Pacific shares outside Japan dipped by 0.07%, while Japan’s Nikkei index gained 0.46%, offering a glimmer of optimism amid an otherwise muted session. Market sentiment across the region remained fragile, reflecting broader concerns over inflationary pressures and global economic uncertainties.
In South Korea, the central bank surprised markets by announcing a second consecutive rate cut, citing stalled economic growth and unexpectedly weak inflation. The move pressured the South Korean won, which weakened after the decision, highlighting the challenges facing the region’s policymakers.
Recent U.S. data revealed consumer spending grew slightly more than anticipated in October, but inflation remains stubbornly above the Federal Reserve’s 2% target. The data raised questions about the Fed’s ability to sustain its easing trajectory without risking economic overheating.
Kristina Clifton, an economist at the Commonwealth Bank of Australia, noted, “We continue to expect the FOMC to cut the Funds rate by 25 basis points at its December meeting. However, another solid monthly core inflation reading for November will challenge the Fed’s view that inflation is trending down.”
Traders have priced in a 65% probability of a December rate cut, but longer-term projections for 2025 remain murky. According to data from LSEG, markets are anticipating approximately 75 basis points of easing by the end of 2025, suggesting a cautious approach to future monetary policy adjustments.
Adding to the uncertainty are renewed fears of tariff wars under the policies of U.S. President-elect Donald Trump. Analysts at Macquarie highlighted the inflationary risks associated with potential tariff implementations.
In a client note, they remarked, “While tariffs introduced in 2018/2019 didn’t ultimately prove inflationary, we caution against extrapolating that experience to the current circumstances.”
This sentiment reflects broader concerns about how protectionist trade policies could disrupt supply chains and exacerbate price pressures, complicating the Federal Reserve’s inflation management goals.
The minutes from the Federal Open Market Committee’s (FOMC) November 6-7 meeting revealed divisions among policymakers regarding the necessity and extent of future rate cuts. Some officials expressed confidence in inflation trending toward the 2% target, while others were wary of persistent price pressures.
European markets also exhibited similar caution. The euro remained steady after a 0.7% rise in the previous session, following remarks from European Central Bank (ECB) board member Isabel Schnabel. She urged a measured approach to rate cuts, advocating for a transition to neutral rather than overly accommodative policy settings.
The Japanese yen, meanwhile, weakened slightly by 0.3% to 151.615 per dollar. Despite this decline, it is poised for its strongest weekly performance since early September, driven by speculation of a rate hike from the Bank of Japan next month.
In the commodities market, oil prices held steady after news of a ceasefire agreement between Israel and Hezbollah eased concerns over supply disruptions. Brent crude futures traded at $72.8 per barrel, while U.S. West Texas Intermediate (WTI) crude stood at $68.7 per barrel.
Gold prices edged down to $2,626 per ounce as investors weighed the likelihood of a slower pace of rate cuts by central banks globally.
The evolving U.S. inflation narrative, coupled with potential trade policy shifts, has significant implications for Asian economies heavily reliant on exports. Higher tariffs on goods destined for the U.S. could exacerbate challenges for these economies, many of which are already grappling with sluggish growth.
South Korea’s unexpected rate cut highlights the region’s struggles to navigate these external pressures. Policymakers in other Asian economies may face similar dilemmas, balancing the need to stimulate growth with managing inflationary risks.
