Asian Stocks Fall as US CPI and Fed Fuel Caution: Markets Fall

(Bloomberg) — Asian stocks fell, shrugging off gains on Wall Street, as the double whammy of the upcoming U.S. inflation report and the Federal Reserve’s decision kept traders on edge.

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Hong Kong’s equity benchmark fell more than 1%, with auto stocks leading the decline ahead of the EU decision on tariffs. Stocks also fell in Japan while indicators in India headed for new record highs. U.S. stock contracts were little changed after the S&P 500 closed at a new high, supported by a rally in Apple Inc.

Treasuries steadied after rising following a strong $39 billion sell-off, reflecting speculation that Wednesday’s inflation numbers would help convince the Fed to cut rates this year. Demand at a 10-year debt auction was strong, with the bid-to-cover ratio of 2.67 the highest since February 2022. Australian bonds rose slightly.

“Chinese markets need a new catalyst after the impact of previous measures on confidence dissipated, and it appears increasingly difficult for China to announce policy easing as declines in Fed rates are delayed.” said Charu Chanana, strategist at Saxo Capital Markets. “Despite continued optimism in the technology sector, markets are becoming slightly cautious in anticipation of risks from today’s US CPI and FOMC announcement.”

Consumer price increases in China held above zero in May, while ex-factory prices remained stuck in deflation, fueling concerns about continued weak demand, according to key Asian data. Separately, the Biden administration is reportedly considering further restricting China’s access to chip technology used for artificial intelligence.

U.S. monetary policy continues to be the most crucial input for traders in Asia, even with post-election volatility in India, with central banks in Japan and Taiwan preparing to make their own rate decisions and various Southeast Asian currencies testing their key support levels.

The Bloomberg Dollar Strength Index extended its advance into the fifth session, hovering near this year’s high. Asian currencies were trading in tight ranges against the greenback.

The Fed is widely expected to keep borrowing costs at their highest level in two decades on Wednesday, but there is less certainty over officials’ quarterly interest rate projections, known as “dotplot”.

The projections “could potentially be a major event for the market, especially if the points show only one rate cut in 2024 instead of two, which seems to be the consensus street view,” Chetan Seth said , Nomura strategist.

The new dot chart will likely show two 25 basis point cuts this year, compared to three in the March version, according to Bloomberg Economics. Economists expect the May CPI reading to give the Fed additional assurance that inflation is slowing.

“The Fed must be convinced that inflation is heading firmly toward its target before cutting rates. It is therefore likely that more convincing evidence of disinflationary trends is needed,” said Naomi Fink,…

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