Asian stocks edged lower on Wednesday, reflecting investor apprehensions as a strong U.S. dollar kept the yen pinned near six-month lows. Market sentiment was dampened by the realization that the Federal Reserve may be slow to reduce interest rates, following data indicating stability in the U.S. economy and labor market.
MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.2%, with Japan’s Nikkei 225 leading the losses, declining 0.8%. The Wall Street slump from the previous day, where all three main indexes closed lower, also contributed to the Asian market’s downturn. The decline on Wall Street was triggered by fears of a potential rebound in inflation, which could delay any easing of monetary policy.
In China, the blue-chip CSI300 Index fell 0.3%, while Hong Kong’s Hang Seng Index dropped 0.55% in early trading. The cautious sentiment was evident across major Asian markets, driven by concerns over global economic conditions and U.S. monetary policy.
The Japanese yen hovered at 157.98 per dollar, close to the six-month low of 158.425 touched on Tuesday. This level was last seen in July when Tokyo intervened to bolster the yen. The Japanese currency has experienced a tumultuous journey, depreciating over 10% against the dollar in the past year and struggling at the start of 2025.
The strong dollar is supported by expectations that U.S. interest rates will remain elevated for a longer period. This diverges sharply from other economies, where central banks may adopt more accommodative stances.
Investor focus is intensely fixed on the U.S. Federal Reserve’s policy trajectory, particularly in the context of the incoming administration of President-elect Donald Trump. The Fed’s December projections indicated only two rate cuts for 2025, down from the previously anticipated four cuts. Markets are currently pricing in a modest 38 basis points of easing this year, with the first rate cut expected in July.
Recent data revealed an unexpected increase in U.S. job openings in November, although hiring appeared to soften. This suggests a labor market slowdown, albeit at a pace that does not necessitate an urgent response from the Fed to cut rates.
Kyle Chapman, an FX markets analyst at Ballinger Group, remarked, “It is certainly too early to call a re-acceleration in inflation from this round of data, and markets will take the bigger clues from non-farms on Friday. With the market now firmly biased towards only a single rate cut this year, for me the room is only growing for a pullback in the overstretched hawkish repricing of the Fed path.”
U.S. Treasury yields surged, with the benchmark 10-year note hitting 4.699%, the highest since April, and last recorded at 4.6768% during Asian trading hours. This rise in yields has bolstered the dollar, with the dollar index, which measures the greenback against six major currencies, standing at 108.65. This is close to the two-year high reached last week, driven by expectations of prolonged higher U.S. interest rates.
The focus now shifts to the U.S. payrolls report due on Friday. Non-farm payrolls are anticipated to have increased by 160,000 jobs in December, following a robust gain of 227,000 in November, according to a Reuters survey. The market will be closely analyzing this data to gauge the Fed’s potential next moves on interest rates.
James Knightley, chief international economist at ING, noted, “The combination of decent growth, elevated inflation concerns, and a slowing, but not collapsing jobs market continues to see the market reducing the pricing on potential rate cuts this year. The risk is that a stronger jobs number and yet another 0.3% month-on-month core CPI print next week sees that being scaled back even more.”
The U.S. inflation report for December 2024, scheduled for release on January 15, will also be a key indicator for market participants.
In the commodities sector, oil prices showed an uptick in early trading. Brent crude rose by 0.34% to $77.31 per barrel, while U.S. West Texas Intermediate (WTI) crude increased by 0.5% to $74.63 per barrel. The gains in oil prices reflect a tight supply outlook amid geopolitical tensions and demand recovery expectations.
Conversely, gold prices eased slightly under the pressure of higher bond yields and a strong dollar. The precious metal was last quoted at $2,647 per ounce, as the dollar’s strength and rising yields reduced its appeal as a safe-haven asset.
