Bond yields increased on Tuesday as Federal Reserve Chair Jerome Powell indicated that the central bank will take a patient approach before implementing any further interest rate cuts. This statement, coupled with anticipation for the upcoming Consumer Price Index (CPI) data, led to a dip in Treasury prices across the yield curve. Money markets are still fully pricing in at least one rate cut by the Fed in 2025. In Asian markets, Treasuries remained steady, while both Australian and Japanese 10-year bond yields saw gains. The Japanese yen, meanwhile, weakened for the third consecutive day.
Investors Exercise Caution Ahead of CPI Data
Despite Powell’s remarks suggesting that the Fed does not need to rush into rate adjustments, investors are taking a cautious approach ahead of the CPI data set for release on Wednesday. Powell’s comments, made during his testimony to Congress, echoed sentiments from January when the Fed held interest rates steady following three consecutive rate cuts in late 2024.
“The market is taking Powell’s comments in stride,” said Frederic Neumann, chief Asia economist at HSBC. “Few believed the Fed would act quickly on further rate cuts, though the door remains open for some easing later this year.”
Currency Movements and Global Impact
The yen was the weakest performer among the G10 currencies on Wednesday, impacted by speculation that Japan’s request for an exemption from U.S. steel tariffs would be rejected. This has led to increased selling of the yen by leveraged accounts, according to an FX trader in Asia.
Meanwhile, India’s rupee saw a significant rally, gaining the most in over two years, likely due to strong intervention by the central bank. The rupee’s recovery came as a surprise to traders, especially after it hit a series of record lows in recent weeks. In contrast, Vietnam’s dong fell to a record low against the dollar on Tuesday.
Technology Stocks and AI Driving Chinese Markets
In China, the technology sector continued to drive market performance. Alibaba Group saw its shares climb by as much as 8.6%, the highest rise since September 2024, following news that Apple is partnering with the company to integrate AI features into its products in China. The rally in Chinese stocks was further boosted by reports on DeepSeek, an AI app, with UBS strategists, including James Wang, stating that the rally in Chinese stocks, driven by AI innovations, may still have significant room to grow.
Inflation Outlook and Fed’s Patience
Investors are closely watching the release of U.S. inflation data, with many expecting little change in price trends to start the year. The robust job market has also supported the economy, reinforcing the Fed’s decision to maintain current interest rate levels.
The U.S. Bureau of Labor Statistics is set to release inflation data on Wednesday, just ahead of Powell’s second day of testimony. Analysts forecast that the core CPI (excluding food and energy) will show a 0.3% increase in January, marking the fifth such rise in the last six months.
“Recent inflation prints, coupled with a strong jobs market, will allow the Fed to maintain its policy stance at the 4.25%-4.50% target range through March,” said Josh Hirt of Vanguard.
Money markets continue to price in just one quarter-point rate cut by the Federal Reserve later this year, with the cut expected by September. In contrast, two rate cuts had been priced in for 2025 back in December. The release of January’s CPI data could further influence market expectations, potentially altering the outlook.
Commodity Market Movements
In the commodities market, oil prices dipped following an industry report that showed a significant rise in U.S. crude stockpiles. Gold prices remained steady after a volatile trading session, during which the precious metal surged to a new high above $2,942 per ounce before pulling back.
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