Day Ahead in Asian Markets

A short-lived conviction that the Fed would stick to a dovish path evaporated after Friday’s bet-busting payrolls number. On Monday, Treasury yields backed up above 4%, with traders introducing a small chance that a rate cut might not happen in November.

While the Fed’s rethink cooled Wall Street’s enthusiasm, the prospects for the U.S. economy to avoid a recession may not hinder Asia’s rally. Mainland Chinese investors will have a fresh international backdrop upon their return on Tuesday from the Golden Week holiday, considering last month’s market rescue with rested eyes.

Beijing has implemented its most aggressive stimulus measures since the COVID-19 pandemic to revive the struggling Chinese economy, and traders are now seeking signs of effectiveness.

Yields on the 10-year and two-year notes rose to their highest levels since late July and mid-August, respectively. Fed funds futures indicated an 85% chance of a quarter-point cut in November, with a 15% chance that the Fed maintains its current rate at the next meeting.

Just a week prior, some had expected the Fed to repeat September’s 50 basis points cut at next month’s meeting. However, a resilient labor market strengthened the argument for a hawkish stance, resulting in the S&P 500 declining nearly one percent.

The dollar consolidated last week’s rally, ending slightly lower against the yen and Swiss franc. Safe-haven currencies, including these two, retained strength, given heightened Middle East tensions that threatened to escalate into a broader conflict following the anniversary of the Hamas attack on Israel that ignited the Gaza war.

The dollar fell about half a percent against the yen after reaching above 149 overnight, its highest since August 15.

The yen’s weakness propelled Japan’s Nikkei to rally almost 2% on Monday, leading a broader market uptrend across the region. MSCI’s broadest index of Asia-Pacific shares climbed nearly 1%, while its Asia index excluding Japan increased almost half a percent.

Key Developments for Tuesday:

• Australia consumer sentiment (Oct)
• Japan Tankan manufacturing and service indexes (Oct)
• Taiwan trade balance (Sept)
• U.S. 3-year note auction