Asia Wary as Fed Rate Outlook Clouds Equity Markets

Asian stock markets displayed a cautious demeanor on Monday, with surging bond yields posing a challenge to equity valuations, particularly for the tech sector, as reported by Reuters. This comes as investors brace for a week packed with central bank meetings and key economic data releases.

While interest rate cuts are anticipated in the United States and Sweden, with rates expected to remain steady in Japan, the UK, and Norway, the focus in the US will be on the Federal Reserve's guidance on future easing.

The Fed is widely expected to cut rates by 25 basis points this week, bringing the new target range to 4.25% to 4.50%. However, investors are keenly awaiting clues on the Fed's trajectory for rate cuts beyond this immediate step.

"We look for the updated dots to signal a median expectation for three cuts next year, down from four in the September projection," said JPMorgan economist Michael Feroli, referencing the Fed's "dot plot" forecasts for future rate paths. "That said, given the vagaries of trade and other policies next year, the signal from the dots may be even less useful than ordinarily."

Investors have been revising down their expectations for the extent of future rate cuts, partly due to recent robust economic data and speculation that President-elect Donald Trump's plans for tax cuts and tariffs will lead to increased government borrowing and inflationary pressures.

This shift in sentiment has significantly impacted the Treasury market, with longer-dated yields recording their largest weekly increase this year. The 10-year note yield is currently at 4.39%, having climbed 24 basis points last week alone, and threatening to breach a key resistance level at 4.50%.

Rising yields are making bonds more attractive relative to equities, potentially increasing the cost of capital for companies.

Across Asia, MSCI's broadest index of Asia-Pacific shares outside Japan was largely unchanged, following a flat week. Japan's Nikkei edged up 0.1%, while South Korea's KOSPI gained 0.7% on pledges of government support.

China's blue-chip index suffered on Friday, as investors awaited further details on potential stimulus measures. Despite an official at China's central bank indicating room for further reserve requirement ratio cuts, recent credit data suggests that past easing has done little to stimulate borrowing.

The Bank of Japan, Bank of England, and Norges Bank are all expected to keep rates unchanged this week, while the Riksbank is predicted to cut rates, potentially by as much as 50 basis points.

The dollar has strengthened on the back of rising yields, putting pressure on emerging market currencies. The dollar is also holding firm against the yen, having gained nearly 2.5% last week. The euro is trading at $1.0508, weakened by Moody's unexpected downgrade of France.

This week will also see the release of key economic data, including Chinese retail sales, industrial production, and house prices, as well as US retail sales and a major inflation report.