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Asian Shares Decline Ahead of Federal Reserve's Decision on Interest Rates

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Andrew R. Michaud

• September 19, 2023

Asian shares mostly declined in cautious trading on Tuesday as investors awaited the Federal Reserve's upcoming decision on interest rates.

Market Performance

In morning trading, Japan's benchmark Nikkei 225 (JP:NIK) dropped 1.2%. Australia's S&P/ASX 200 (AU:XJO) lost 0.4%, while South Korea's Kospi (KR:180721) edged down 0.3%. Hong Kong's Hang Seng (HK:HSI) slipped 0.1%, and the Shanghai Composite (CN:SHCOMP) fell 0.1%. However, benchmark indexes in Singapore (SG:STI) and Taiwan (TW:Y9999) saw gains, while stocks slipped in Indonesia (ID:JAKIDX).

Fed Meeting and Speculation

The Federal Reserve's two-day meeting is set to conclude on Wednesday, with the market eagerly anticipating its decision. Furthermore, Japan's central bank will hold a meeting on Thursday-Friday, leading to speculation that it may gradually adjust its longstanding negative interest rate policy.

Yeap Jun Rong, a market analyst at IG, remarked, "Market sentiments remained in its usual wait-and-see mode ahead of the Federal Open Market Committee meeting this week."

Wall Street Performance

On Monday, Wall Street experienced mixed results. The S&P 500 (SPX) edged up 0.1% to 4,453.53, while the Dow Jones Industrial Average (DJIA) rose less than 0.1% to 34,624.30. The Nasdaq composite (COMP) added less than 0.1% to reach 13,710.24.

Impact of Fed Decision

The uncertainty surrounding whether the Federal Reserve will end its interest rate hikes has led to volatile market conditions since early August. While higher rates have helped cool inflation from its peak last summer, they have also negatively affected stock and investment prices while slowing down the economy.

Fed's Meeting Expectations

Traders widely anticipate that the Fed will maintain steady interest rates at this week's meeting. The focus will primarily be on the forecasts and projections that Fed officials will release regarding interest rates, the economy, and the job market in the coming years.

Data from CME Group suggests that traders are betting on a roughly 40% chance of another rate increase by the Fed in either November or December.

The Federal Reserve and Interest Rate Cuts

Introduction

As the Federal Reserve (Fed) prepares for its upcoming meeting, investors are eagerly awaiting any indications about potential interest rate cuts in the coming year. These cuts are highly anticipated by investors as they can improve financial conditions and provide a boost to financial markets. However, the key question remains: by how much will the Fed cut rates?

Inflation Challenges and Oil Prices

Efforts to bring inflation down to the Fed's target of 2% have been hindered by a recent surge in oil prices, sparking concerns that interest rates may need to remain higher for a longer period. These fears have raised uncertainty about the extent of rate cuts that the Fed could implement.

Economic Amplitude

While worries about a possible recession still linger, recent reports have shown that the economy and job market remain resilient. One cause for concern is the current state of bond yields, with shorter-term yields exceeding longer-term yields – a phenomenon that has historically preceded recessions.

Leading Economic Indicators

Another potential warning signal comes from the leading economic indicators index, which examines new orders for manufacturers, consumer expectations for business conditions, and other factors that provide insights into the future direction of the economy. According to Doug Ramsey, the chief investment officer of The Leuthold Group, whenever the index's six-month annualized rate-of-change contracts by 3% or more, a recession usually follows. The most recent signal occurred 15 months ago, with the longest gap between signal and recession being 16 months before the Great Recession. If history repeats itself, this could imply a recession beginning in October.

Oil and Currency Market Updates

In energy trading, benchmark U.S. crude prices rose by 81 cents to reach $92.29 a barrel on the New York Mercantile Exchange (NYMEX). This increase follows a rise of 71 cents on Monday, taking the price to $91.48. Notably, this is a significant surge from the price of under $70 in July. Meanwhile, Brent crude, the international standard, saw a modest rise of 18 cents to reach $94.61 per barrel.

In currency trading, the U.S. dollar slightly increased against the Japanese yen, trading at 147.71 yen compared to 147.58 yen.

As the market awaits the Fed's decisions and announcements, investors remain watchful of these developments, which may have substantial implications for the financial landscape in the months ahead.