Japan’s Nikkei 225 index slid on Wednesday after recording its biggest monthly drop since December 2022. Australian shares also declined, with many markets in the region closed for a public holiday. The S&P 500 fell the most since January after a jump in a broad gauge of US labour costs closely watched by policymakers reinforced bets that officials will keep rates unchanged at a two-decade high on Wednesday — and are unlikely to lower them anytime soon. US stock futures slipped in early trading.
“Public holidays in China and parts of Europe will thin markets slightly, and there’s likely to be a level of risk aversion in Asian trade today going into the FOMC decision,” said Kyle Rodda, a senior market analyst at Capital.com. “If the Fed asserts a high probability of no cuts this year, or even the open possibility of another hike, that could deepen the sell-off in stocks.”
The yen was steady with an index of the dollar stabilising after gaining the most in more than two weeks on Tuesday. Treasury two-year yields edged slightly lower after reaching the highest level since November, while Australia’s 10-year yield jumped six basis points early Wednesday.
The focus is shifting to the Fed’s policy meeting that will conclude later Wednesday. The last time Fed Chair Jerome Powell spoke, he pointed to the lack of further progress in bringing inflation down and to enduring strength in the labour market. The latest inflation signals — in tandem with expectations for a robust employment report on Friday — are not likely to lead him to change his tune.
A plunge in consumer confidence further weighed heavily on US equities — which suffered their worst month since September. In late hours, Amazon.com Inc reported strong sales for its cloud unit amid rising artificial intelligence demand. Advanced Micro Devices Inc, the second-biggest maker of computer processors, gave a lukewarm revenue forecast for the current period.
A survey conducted by 22V Research shows that only 16% of investors polled expect a “risk-on” reaction to Wednesday’s Fed decision, 44% said “risk-off,” and 40% “negligible/mixed.” The tally also revealed that two-thirds of respondents still expect a rate cut in 2024.
Sticky US inflation this year is not necessarily bad news for the stock rally as higher yields are a reflection of strong economic growth, according to HSBC strategists led by Max Kettner.
“If the Fed’s cuts turn out to be more like the recalibration in the mid-1990s and 2019, it may not necessarily be bad news for risk assets,” they said.
In other markets, gold edged higher early Wednesday after extending its decline from a record high reached in mid-April. Oil continued to slip as the potential for a ceasefire in the Middle East eased geopolitical tensions.
Copper declined on Tuesday as traders turned their attention to demand conditions in China while cocoa crashed amid extreme volatility and a lack of liquidity.