MARKETS: The Fed’s sharp interest rate cut cheers up Asian stock markets

Yesterday, the Open Market Committee of the Federal Reserve, the central bank of the United States, lowered its key interest rate by 0.50 percentage points to a range of 4.75-5.00 percent. The interest rate cut was the first since spring 2020.

“We see the risks to our employment and inflation targets as roughly balanced, and we are vigilant about the risks to each part of our dual mandate,” Fed Governor Jerome Powell said at a news conference after the rate cut.

According to Powell, the US economy is in good shape, and the Fed aims to keep it in good shape with yesterday’s decision.

Economist polls collected by Reuters and Bloomberg predicted a drop of 0.25 percentage points, but derivatives markets expected a drop of 0.50 percentage points.

OP: n senior market economist Jari Hännikäinen found the decision somewhat surprising. The Fed’s future steps are also thought-provoking. OP changed his view at the Fed’s next meeting in November and now expects an interest rate cut in November as well.

“The Fed’s interest rate indications did not bring much-needed clarity to the monetary policy outlook. The members point to the continuation of interest rate cuts during the rest of the year and next year, but the interest rate outlook of the membership is badly divided”, writes Hännikäinen in his comment.

Futures exchange CME:n Based on the Fedwatch tool, the market is now pricing in a two-thirds chance of a 0.25 percentage point rate cut at the Fed’s next meeting in November and a one-third chance of another half-percentage point cut.

US stock markets finished slightly lower yesterday after Powell’s appearance.

Stock markets in Asia were broadly rising on Thursday. The Asia Dow index was up two percent.

The Tokyo Stock Exchange’s Nikkei and Topix indices were up 2.5 percent. Discretionary consumption, the financial sector and machine shops were among the sectors with the biggest increases of more than three percent.

The Hang Seng index of the Hong Kong stock exchange was up 1.8 percent. In mainland China, the rate of increase was more moderate at less than one percent.

In Taiwan, the rate of increase was more than one percent, in Korea and India more than half a percent.

The Euro Stoxx 50 future was up 1.2 percent, anticipating a strong opening for the European stock markets.

On the foreign exchange market, the yen softened strongly. The yen had weakened by 0.6 percent against the dollar, the euro and the pound.

In euros, you got 1.112 dollars, divide by dollars 143.16 yen.

Central bank interest rate meetings are also underway in England and Japan. The Bank of England is expected to refrain from another interest rate cut and keep the key interest rate at 5.00 percent in the interest rate decision to be announced this afternoon Finnish time. Tomorrow’s interest rate decision by the Bank of Japan is also expected to keep the key interest rate unchanged at 0.25 percent.

The weakening of the yen is due to views that the Fed is not going to hurry with future interest rate cuts. The selling of yen by Japanese export companies also affects the day’s market movement in yen, Resona Holdings senior strategy Keiichi Iguchi reviews Bloomberg.

“If the US economy makes a soft landing (soft landing), the Fed is in no rush to cut interest rates. The support level for the yen is at 140 yen to the dollar,” Aozora Banking chief market strategist Akira Moraga commented to Bloomberg.