Asian equities may face downward pressure due to the continued hawkish re-evaluation of central bank rate forecasts. This shift is driven by robust economic data and statements from central banks. Regarding core risk assets, expectations for Federal Reserve rate cuts have been revised lower, now anticipating a 140-basis point reduction over the next year, compared to the previously expected 170 basis points. Market trends show a declining likelihood of a rate cut in March, currently at 56%, a drop from 68% post Fed’s Governor Christopher Waller’s remarks and 86% following the US PPI data release. The surge in US yields is enhancing short-term demand for the USD and is introducing risk-off flows to risk assets. Monitoring this trend is crucial as the Fed enters its blackout period starting this Friday.
In China, recent weak economic figures have affected China-related stocks, though the Yuan has remained relatively stable, buoyed by strong industrial production data from December. Market participants continue to anticipate further easing and economic support measures. However, the PBoC did not meet these expectations this week when it chose not to reduce a key interest rate. The potential for further economic deceleration later in the year is a concern, potentially maintaining pressure on Chinese stocks. Looking forward, the Australian employment report will be a focal point in the Asia-Pacific region, followed by U.S. jobless claims and the Philadelphia Federal Reserve’s manufacturing index. Significant updates from officials at the World Economic Forum in Davos will also be under scrutiny, as markets currently exhibit a defensive stance. Additionally, the options expiry in the US on Friday could significantly influence equity prices.
