Cautious Start in Asia: Stock Markets Open Quietly in a Pivotal Week

Asian stock markets initially remained steady on Monday during a week that promises significant monetary policy decisions in the United States. The question is less about whether the Federal Reserve (Fed) will cut interest rates but by how much. Market participants are divided on whether a drastic step is imminent. Central banks in Japan and the United Kingdom are also meeting this week, with expectations that neither will make any immediate changes. A slew of economic data, including U.S. retail sales and industrial production, is also on the agenda. Political tensions continued to cause unrest. According to FBI reports, Donald Trump, the Republican presidential candidate, was the target of a second assassination attempt on Sunday. Holidays in China, Japan, South Korea, and Indonesia led to thin trading volumes, resulting in modest initial movements. The broadest index of Asia-Pacific shares outside Japan remained nearly unchanged, after rising 0.8% the prior week. Japanese Nikkei futures traded lower despite a holiday in Japan, as recent yen gains put pressure on exporters. S&P 500 and Nasdaq futures were both slightly positive. Disappointing economic data from China over the weekend added further uncertainties. Industrial production growth fell to a five-month low in August, while retail sales and new house prices continued to weaken. "The data support the need for additional economic stimulus by the end of the year if China wants to achieve its growth target of around 5% for 2024," said Vivek Dhar, an analyst at CBA. Futures imply a 52% probability that the Fed will cut rates by 50 basis points on Wednesday. Media reports have fueled expectations of a more aggressive easing. "We believe it's likely that the Fed will take the 'right' step and cut by 50 basis points," said JPMorgan economist Michael Feroli. If this occurs, Feroli also expects further projected rate cuts of 100 basis points this year and 150 basis points for 2025. The market has already priced in rate cuts of 114 basis points by Christmas and another 142 basis points for next year. Analysts at ANZ emphasize that previous easing cycles with larger cuts have always raised concerns about a recession, which is not the case this time. The prospects of aggressive easing pushed bond prices higher, with the two-year Treasury yields falling to 3.593%, the lowest closing level since September 2022. The Bank of England is expected to keep rates steady at 5.00%, although markets price in a 31% chance of another cut. The Bank of Japan meets on Friday and is also not expected to make changes but may lay the groundwork for tightening in October. The South African central bank might cut rates this week, while Norway's policymakers are expected to maintain a steady stance. Falling Treasury yields supported the yen, which traded at 140.82 yen per dollar after declining 0.9% last week. The euro held steady at $1.1086, constrained by prospects of further rate cuts by the European Central Bank. The Canadian dollar remained at 1.3580 per U.S. dollar after Bank of Canada Governor Tiff Macklem hinted at faster rate cuts in an interview. Lower bond yields supported gold prices, which were near an all-time high at $2,579 per ounce, close to a record of $2,585.99. Oil prices edged up as nearly a fifth of crude production in the Gulf of Mexico remained offline. Brent rose by 19 cents to $71.78 per barrel, while U.S. crude increased by 28 cents to $68.93 per barrel.