Stocks rise as weak China data stokes stimulus hopes; euro waits on ECB

Asian stocks hit two-month highs on Thursday and the dollar notched new peaks against the yen and the yuan as the Federal Reserve paused rate hikes while flagging more, drawing attention to the contrast with more dovish policy outlooks in Asia.

The Fed left its benchmark funds rate window at 5-5.25%, as expected, yet committee members surprised markets by projecting two more 25 basis point (bps) hikes this year, sending short-term U.S. yields higher and closing out bets on any cuts in 2023. [US/]

The European Central Bank, meanwhile, is expected to deliver its eighth straight rate hike later in the day which will take borrowing costs to two-decade highs. The euro, which made a one-month high at $1.0865 overnight, traded at $1.0816 as investors awaited the decision.

That cast Asia’s biggest economies in stark relief, with China cutting another key policy rate on Thursday amid fresh signs its economy is stumbling and traders betting the Bank of Japan will stick with its ultra-easy monetary policy this week.

The yen fell about 0.9% to a six-month low of 141.43 per dollar. The yuan hit a six-month trough of 7.1819, while hopes of more stimulus sent stock indexes in Hong Kong and Shanghai up by more than 1%. (HK)

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6% to a new two-month high, while Japan’s tearaway Nikkei extended its rally to new three-decade peaks. (T)

S&P 500 futures were flat. European futures and FTSE futures each fell about 0.2%.

“The Fed is being pretty steadfast,” said Bart Wakabayashi, branch manager at State Street (NYSE:STT) in Tokyo, which has brought back the contrast with stimulatory Japan to the fore.

“They point at inflation, the labour market and wages and say look we want (inflation) at 2% and whether it’s 6% or 5% or 5.5% it’s still not at 2% – they’re going to do they need to do to get that down to 2%.”

Two-year Treasury yields, which closed two bps higher at the end of the New York session rose another 3.5 bps in Tokyo trade to 4.7416%. Ten-year yields rose 3.1 bps to 3.8291%.

Fed funds futures pricing didn’t budge all that much in the wake of the meeting, but expectations for a hike next month firmed a little and traders pushed any hopes for cuts deeper into 2024.

“The conditions we need to see … to get inflation down are coming into place,” Fed Chair Jerome Powell said. “But the process of that actually working on inflation is going to take some time.”

CHINA SLOWDOWN

In Asia, the focus was on China where industrial output and retail sales figures fell short of market forecasts and property investment and home sales tumbled at a sharper pace, in the latest sign the country’s post-pandemic economic recovery is losing steam.

China cut a key benchmark, its medium-term loan rates, by 10 bps — two days after trimming short-term rates — and the yuan hit a six-month low in anticipation that more support is on the way, before steadying somewhat.

“Expectations are building that additional stimulus will come from Beijing and this could be the much needed catalyst for the Chinese market to overcome a disappointing first half,” said Tai Hui, Asia-Pacific chief strategist at J.P. Morgan Asset Management.

Elsewhere those hopes and strong Australian jobs data leant support to the Aussie dollar, which was firm at $0.6822, while the New Zealand dollar was on the ropes after data showed the economy shrank into recession this year.

That likely confirms an end to rate hikes and the kiwi was last down 0.2% at $0.6197. [NZD/]

The euro, which has been grinding higher on the dollar for about two weeks on signs of slowing U.S. inflation and hints of cooling in the labour market, faces its next test when the ECB meets later in the day. A 25 bps hike is expected.

The yen slipped as expectations build that the BOJ makes no policy adjustments when its two-day meeting ends on Friday. Japanese government bonds rallied a little. [JP/]

Oil steadied with benchmark Brent crude futures up 0.5% to $73.55 a barrel. [O/R]

Gold, which pays no income, was pressured by expectations for U.S. interest rates to linger at high levels, and fell to a two-week low of $1,934 an ounce. [GOL/]

Bitcoin dropped 3% overnight and nursed losses just below $25,000.