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Asian markets experienced a robust rally for the fourth consecutive session on Monday, driven by expectations of earlier rate cuts in the United States and Europe. These bullish expectations will be closely monitored as central bank speakers take the stage throughout the week.
The bond markets, which had faced challenges recently, also rebounded as a benign U.S. payrolls report and positive productivity figures indicated a cooling labor market. This, in turn, diminished the need for further interest rate hikes by the Federal Reserve.
Bruce Kasman, the Head of Economic Research at JPMorgan, expressed optimism, saying, “This year’s better-than-expected U.S. supply-side performance raises hopes for a soft landing.” He believes that strong productivity and labor supply gains could pave the way for early Fed easing while maintaining low inflation.
Futures markets reflected these sentiments, with a 90% chance of the Fed halting rate hikes and an 86% chance of the first policy easing occurring as soon as June. In addition, markets suggest an 80% probability of the European Central Bank implementing rate cuts by April, while the Bank of England is expected to ease in August.
Central bank officials will share their views on this dovish outlook, with at least nine Fed members, including Chair Jerome Powell, scheduled to speak this week. The Bank of Japan is also gradually moving towards tightening policy, although it remains cautious.
Australia’s central bank is the exception, likely to resume raising rates due to persistent high inflation. Meanwhile, China, which is closely monitored for trade and inflation data this week, is expected to benefit from lower borrowing costs.
Hopes for reduced borrowing costs have boosted MSCI’s broadest index of Asia-Pacific shares outside Japan, with a 2.0% gain. Japan’s Nikkei saw a 2.4% increase, while South Korea rose by 4.3%, supported by the re-implementation of a short-selling ban.
Chinese blue-chip shares gained 1.3%, anticipating upcoming trade and inflation data releases.
On the other hand, S&P 500 futures and Nasdaq futures remained stable. EUROSTOXX 50 futures showed little movement, while FTSE futures inched up 0.1%.
In the bond market, two-year Treasury yields held at 4.86% after a 17-basis point drop last week. Yields on 10-year notes stood at 4.586%, still below the peak in October.
Analysts at NatWest Markets expect rate cuts from the Fed, ECB, and BoE to come sooner and potentially be more substantial than what the market currently anticipates. They foresee the Fed Funds rate falling to 3-3.25%, the ECB depo rate to 3%, and BoE Bank Rate to 4.25% by the end of 2024.
The retreat in Treasury yields led to a decline in the dollar, which remained at 105.080. The euro was firm at $1.0735, while the yen gained ground against the dollar, standing at 149.52.
Gold maintained its strength at $1,983, nearing a recent five-month peak of $2,009, thanks to the drop in the dollar and yields.
Oil prices made a slight recovery after a 6% decline last week, with support from Saudi Arabia and Russia’s commitment to continue their additional voluntary oil output cuts.
In the Middle East, Israel rejected calls for a Gaza ceasefire, indicating an intensification of operations against Palestinian Islamist group Hamas.
Brent added 43 cents to reach $85.32 a barrel, while U.S. crude climbed 54 cents to $81.05 per barrel.
