Bond yields climbed on Tuesday as Federal Reserve Chair Jerome Powell indicated that the central bank would not rush to cut interest rates further. Investors also looked ahead to the upcoming Consumer Price Index (CPI) data for more insight.
Treasuries across the curve fell, with money markets still fully pricing in one rate cut by the Fed later this year. In international markets, Australian and Japanese 10-year yields rose, while the yen continued its decline for the third consecutive day. Hong Kong shares rose, but a broader Asian equities index dropped to its lowest level in a week.
Powell’s Cautious Approach to Interest Rate Cuts
Despite investor caution ahead of the CPI report, Powell reassured Congress that the Fed does not need to rush to cut rates, noting that the economy remains strong. His comments echoed statements made in January, after the Fed kept interest rates unchanged following cuts in the previous three meetings of 2024.
“The market is taking Powell’s comments in stride,” said Frederic Neumann, chief Asia economist at HSBC. “Few believed that the Fed would act quickly on further rate cuts, though there’s still a chance for easing later in the year.”
Currency Movements in Asia
In Asia, India’s rupee saw its biggest rally in over two years on Tuesday, driven by what appeared to be strong intervention by the central bank. The currency had recently hit several record lows. Meanwhile, Vietnam’s dong fell to a record low against the US dollar.
The Japanese yen was the worst-performing currency among its Group-of-10 peers, continuing its recent decline.
Chinese Stocks Focus on Technology
Investors have turned their attention to the technology sector in China. Shares of Alibaba Group Holding Ltd. rose by up to 5.8% after reports that Apple Inc. is partnering with Alibaba to bring AI features to products in China. This news, along with a rally in Chinese stocks driven by DeepSeek’s artificial intelligence app, lifted the Hang Seng Index, with UBS strategists, including James Wang, suggesting that the rally might be “less than halfway” done.
Inflation Data and Its Impact on Fed Policy
As traders await a key US inflation reading later today, prices have shown little sign of easing in the new year. Healthy job growth has helped support the economy, reinforcing the Fed’s decision to maintain current interest rates for now.
The Bureau of Labor Statistics is set to release CPI figures on Wednesday, shortly before the second half of Powell’s two-day testimony. The data is expected to show a 0.3% rise in the consumer price index excluding food and energy for January, marking the fifth time in the last six months that the measure has increased by this amount.
“Recent inflation prints, coupled with a strong jobs market, will allow patience from the Federal Reserve, who will likely keep the policy target range at 4.25%-4.50% in March,” said Josh Hirt, an economist at Vanguard.
Rate Cut Expectations and Market Reactions
Money markets continue to fully price in a single quarter-point rate cut by the Fed by September this year, down from two rate cuts priced in for 2025 in December. The release of the January jobs report last Friday caused traders to reassess their expectations for Fed policy, with the upcoming CPI data possibly shifting the outlook further.
“With the labor market remaining strong and inflation slightly above the Fed’s target, it’s not surprising that traders are pushing back expectations for another rate cut toward the middle of the year,” said Matthew Weller, a strategist at Forex.com and City Index.
Commodities and Market Movements
In the commodities market, oil prices edged lower after a recent increase, fueled by signs that US sanctions are impacting Russian crude supplies. Meanwhile, gold remained steady after a volatile trading session that saw it surge to a new peak above $2,942 an ounce before pulling back.
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