Fed's Cautious Stance Sends Asian Stocks Tumbling

Asian markets took a breather on Thursday, 25 September, following declines amid a more cautious stance by Fed policymakers on rate cuts ahead of critical economic calendar events. The dollar reached a 2-week high before reversing gains, while USDJPY gains of 1% overnight flipped on the back of hawkish BOJ minutes.

In the US, the equity market had a similar fate on Wednesday, with Stella Qiu at Reuters partially attributing the losses to high valuations and quarterly rebalancing. An interest rate cut may be well priced in at 92%; however, markets have notched down their expectations to four total rate cuts from five this cycle.

TL;DR

• Asian markets paused Thursday’s declines behind the Fed's cautious stance and a stronger dollar on Wednesday

• Quarter-end rebalancing and elevated valuations added selling pressure

• USDJPY reversed 1% gains after hawkish BOJ minutes revealed rate hike discussions

• Key US data, including PCE inflation due to be released on Friday, could guide markets next

Why Did the US Dollar Rise on Wednesday?

The US dollar rose on Wednesday after Fed Chair Jerome Powell took a cautious stance on Tuesday night against cutting rates, shifting some of the focus back to inflation. At his first speech following last week’s rate cut, Powell said that “risks to inflation are tilted to the upside and risks to employment to the downside.” 

Other bank presidents also maintained a more hawkish stance. Chicago Fed President Austan Goolsbee, for example, showed little willingness to cut rates with inflation heading higher. On the other hand, Fed’s Daly noted labour market risks and pushed for further action, a stance that resembles that of new Governor Stephen Miran. 

Recent hawkishness has helped the dollar rise, as it reduced the cycle rate by one rate cut so far, despite expectations of two more rate cuts this year. The USDJPY forex pair saw a large upside on Wednesday but reversed after the BOJ minutes from the last meeting opened up the door to further rate hikes, widening the divergence between the two banks.

How Did BOJ Minutes Change the Course for USDJPY

The yen weakened to 148.00 against the dollar on Wednesday but reversed some of the losses as the Bank of Japan (BOJ) minutes, released early Thursday, showed that board members discussed hiking rates. The BOJ held rates unchanged in its September meeting, but two of its board members dissented. Following the minutes, markets are not pricing in a 50% chance of a hike at the 30 October meeting, when it will release its new quarterly projections for growth and inflation.

On the other hand, the Fed pivoted in its last FOMC meeting, and its dot plot agreed with market expectations of two more rate cuts this year. However, in the aftermath of the Fed Chair’s less dovish tone, the pace of 2025 rate cuts has decreased to 43bps, down from 50bps. Given that Japan is facing a political crisis at home following the resignation of Shigeru Ishiba as PM, risks remain, including a US downturn.

What is Behind the Quarter-End Volatility

Besides Fed speakers being a bit more cautious and the strength of the dollar impacting US stocks, Wall Street’s 2-day drop may be partially attributed to end-of-quarter and month-end flows due to rebalancing. Both events see institutional players sell stocks to secure or reinvest profits to get their portfolio back to balance. However, this sometimes suggests that laggards may receive a boost, depending on the ratio between growth and value stocks' positioning.

Over the past three years, growth stocks have outpaced gains of value stocks due to the AI hype, suggesting that rebalancing may provide a headwind for growth stocks. Valuations are at a 2021 high, and further upside would position US stocks at the levels of the dot-com bubble. Powell himself said on Tuesday that “equity prices are fairly highly valued,” which weighed on US stocks. Some analysts even pointed to former Fed Alan Greenspan, who emphasised in a 1996 speech that “irrational exuberance” had sent asset prices soaring. 

Investors will be closely monitoring whether the Fed maintains a similar approach for clues to upcoming decisions.

Which Economic Data Could Drive Markets Next

Powell sent warning signals to markets on Tuesday, but how the market pricing of rate cuts plays out might be affected by upcoming events. US weekly jobless claims are due later today, Thursday, alongside the final Q2 Gross Domestic Product (GDP) reading and several Fed speeches by the Fed’s Goolsbee, Williams, Bowman, Barr, and Daly. Despite unemployment claims gaining some popularity recently as a focus of the Fed’s attention on employment and potentially shifting expectations and affecting the dollar, the market reaction may be contained ahead of the Fed’s own favourite inflation gauge, released on Friday, the core PCE.

August PCE expectations for core PCE sit between 0.28% and 0.35% month-over-month (MOM), according to Nick Timiraos of The Wall Street Journal. Barclays estimated that FOMC members expected the core rate to rise 0.27% in December, slightly higher due to the effects of tariffs. The Fed itself expects headline inflation at 2.7% year-over-year (YOY) in August and core inflation at 2.9%. However, at the last FOMC, the Fed raised its expectations for 2026 to 2.6% from 2.4%, while noting a greater focus on employment. (Source: Newsquawk)

*Past performance does not indicate future results. The above are only projections and should not be taken as investment advice.