Japanese shares led regional gains as the yen’s slide on Tuesday boosted the outlook for the nation’s exporters. The dollar bounced in New York following stronger-than-expected retail-sales data. Hong Kong is shut for a holiday, while Chinese stocks listed on mainland markets will resume trading after a break.
Market-implied odds now put the chance of a half-point Fed cut Wednesday at just over 50%, with the uncertainty over the size of the move helping to boost risk assets including Bitcoin and oil. Treasuries were little changed in Asia after edging lower on Tuesday.
“With the Fed meeting holding the potential to significantly boost volatility, there are clearly enough reasons for would-be buyers to sit on their hands,” said Chris Weston, head of research at Pepperstone Group. “While shorts may look to cover, the prospect of a day where we see a grind lower through trade on lighter volumes seems highly plausible,” he said.
For several market observers, perhaps the most-important aspect of what happens may be the investor reaction. Could a 25 basis-point reduction leave traders worried the Fed is behind the curve? Could a 50 basis-point move spook markets that the Fed must know the economy is in dire shape? Or will investors be reassured that, whatever the Fed does, Chair Jerome Powell is on top of the situation?
“It’s rare under the Powell Fed for markets to be this ‘up in the air’ on what exactly the Fed will do with just one day to go before the decision,” according to Bespoke Investment Group strategists. “Although maybe the Fed is happy with the market being 100% sure that we’ll at least get a cut.”A survey conducted by 22V Research showed investors who expect a 25 basis-point reduction are split on whether that cut would deliver a “risk-on” or “risk-off” reaction. Meantime, those betting on 50 basis points think a smaller Fed move would be “risk-off.”
Golden Dragon
The S&P 500 closed near 5,635 and the Nasdaq 100 and Dow Jones Industrial Average were also little changed. The Nasdaq Golden Dragon Index — a gauge of Chinese shares listed in the US — set its highest close in almost a month.
The yen weakened more than 1% against the dollar on Tuesday to snap a five-day rally driven by bets on a dovish Fed and hawkish Bank of Japan. The currency trimmed some of those losses on Wednesday. Governor Kazuo Ueda is set to keep rates hold on Friday and discuss whether conditions are falling into place for another hike this year.
In the US, the Fed will either cut 50 basis points or opt for a 25 basis-point reduction, but signal it will be more aggressive going forward, according to Matt Maley at Miller Tabak.
Still, he says, that does not guarantee that stocks and/or bonds will rally in a meaningful way. Maley says the Fed will likely try to convey that a more dovish stance is not seen as something that means they’re suddenly worried about an imminent recession.
“Therefore, given that the stock market is approaching overbought territory, we could still get a ‘sell the news’ reaction to the Fed this week,” he said.
Press Conference
What Powell says in his press conference about the state of the US economy could help build confidence for those worried about a recession in the near term, according to Kristina Hooper at Invesco, who expects the Fed to cut by 25 basis points.
“It will be valuable to hear Powell’s thoughts on the expected path of rate cuts — in particular, what conditions could trigger a change of course, either a moderation or acceleration in easing,” she said. “These are just things you can’t glean from the dot plot, so the press conference is ‘must see TV’ in my view.”
Crude oil closed higher for a second session on Tuesday after thousands were hurt in what Hezbollah labeled an attack by Israel involving pagers in Lebanon, which raised fears of an escalation of the conflict in the Middle East. Prices stabilized at higher levels Wednesday, with a dour demand outlook coming back to the fore as an industry report showed expanding US crude stockpiles while refineries in Europe cut oil processing rates.