Asian markets faced a downturn as fresh data intensified worries about the state of China’s economy, leading investors to scale back expectations of interest rate cuts by the Federal Reserve. The decline ensued after official figures revealed that while China achieved its 2023 economic target, the country’s housing market continued to deteriorate, and domestic demand remained lackluster.
Equity markets spanning South Korea to Australia registered losses, exerting pressure on a regional indicator. Japan stood out as an exception, benefiting from a weaker yen. Meanwhile, US stock futures also witnessed a slide, Treasury movements remained stable, and the dollar saw marginal gains. China’s nominal GDP growth in 2023 lagged behind real GDP growth, pointing to deflationary pressures. A weak labor market suggests that China is likely growing below its potential growth.
On Tuesday, the S&P 500 experienced a 0.4% loss, and Treasuries faced a decline with 10-year yields rising approximately 12 basis points. These developments followed comments from Fed Governor Christopher Waller, who advocated caution but acknowledged the possibility of a rate cut this year if inflation approaches the central bank’s target. He emphasized that when the time is right, any rate adjustments should be executed methodically and carefully. Reflecting a reassessment of Fed rate cut expectations, the swaps market pricing for a rate cut in March edged lower to around 65%, down from 80% on Friday.
In the commodities market, oil witnessed a decline, influenced by a stronger US dollar and an overall risk-off sentiment, which offset concerns about escalating tensions in the Middle East. This includes ongoing attacks on ships in the Red Sea by Iran-backed Houthi rebels. The US dollar’s notable rally, driven by shifts in yields and diminished expectations of rapid Fed rate cuts this year, impacted various markets. Gold, after experiencing a decline of more than 1% on Tuesday, stabilized around $2,028 per ounce.