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Asia cautious as everything rides on dovish Powell

July 10
09:27 2019

Asian shares inched ahead on Wednesday while higher Treasury yields lifted the dollar as markets wondered if the world’s most powerful central banker would confirm or confound expectations for US policy easing this month.

MSCI’s broadest index of Asia-Pacific shares outside Japan advanced 0.2 percent, after three sessions of losses.

South Korea climbed 0.6 percent, but Japan’s Nikkei lagged with a loss of 0.15 percent. E-Mini futures for the S&P 500 added a slim 0.08 percent.

Federal Reserve Chair Jerome Powell testifies before the US Congress on Wednesday and Thursday and investors have a lot riding on him sounding suitably dovish.

Futures are still fully priced for a 25-basis-point cut at the Fed’s July 30-31 meeting, but have abandoned wagers on a half-point move. They had implied a 25 percent probability of an aggressive cut before Friday’s upbeat jobs report.

“We still think the odds favor of a 25 bps “insurance” cut,” said Kevin Cummins, a senior US economist at NatWest Markets.

“The Fed’s consideration of rate cuts is not only about growth but also about inflation, which remains well below target, and inflation expectations, which were breaking to the downside before the Fed signaled the likelihood of cuts.”

Overnight, Atlanta Fed bank president Raphael Bostic let nothing out of the bag by saying the central bank was debating the risks and benefits of letting the US economy run “a little hotter.”

Lurking in the background, US and Chinese trade officials held “constructive” talks on trade by phone on Tuesday, White House economic adviser Larry Kudlow said.

Wall Street had been dully circumspect, with the Dow ending Tuesday down 0.08 percent, while the S&P 500 added 0.12 percent and the Nasdaq 0.54 percent.

MORE YIELD

The cooling in US rate fever has seen bonds give back just a little of their huge rally, with yields on two-year Treasuries rising to 1.909 percent from the recent trough of 1.696 percent.

That in turn has helped the dollar bounce on a basket of currencies to 97.537 from a June low of 95.843.

The dollar also firmed to 108.96 yen, while the euro faded to USD 1.1204 having been as high as USD 1.1412 just a couple of weeks ago.

The Mexican peso was nursing a few bruises after sliding on Tuesday when the country’s moderate Finance Minister Carlos Urzua suddenly resigned, citing “extremism” in economic policy.

The Canadian dollar was on the defensive ahead of a rate meeting by the Bank of Canada in case policy makers tried to slow the currency’s recent rally.

The dollar’s gains took the shine off gold, which eased 0.3 percent to USD 1,393.14 per ounce.

Oil prices were supported by Middle East tensions and OPEC supply cuts.

Brent crude futures rose 67 cents to USD 64.83, while US crude gained 83 cents to USD 58.66 a barrel.

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