Asia open: The FOMC whipsaw and more Yen intervention in focus

Markets

Market participants clung to every word uttered by Chair Powell as risk assets whipped around in a frenetic fashion during the afternoon US trading session.

Ultimately, U.S. stocks finished mixed after Powell stated that the interest rate cuts Wall Street desires are still likely, albeit potentially delayed due to stubbornly high inflation. The S&P 500 fell 0.3% on Wednesday after a significant afternoon rally evaporated. Meanwhile, the Dow Jones Industrial Average rose 0.2%, and the Nasdaq composite lost 0.3%.

Powell's remarks indicated that while inflation is taking longer than anticipated to come under control, the Fed's next move is unlikely to be a rate hike. Additionally, he announced measures to help stabilize the bond market, providing some downside protection for financial markets.

Initially, investors found solace in Powell's remarks, which alleviated concerns that the Fed might adopt a more aggressive stance in response to signs of stalled inflation progress. Additionally, futures markets indicated a slightly higher probability of policymakers implementing two rate cuts this year, compared to the previously expected one cut.

However, on a more realistic note, Powell refrained from explicitly indicating that rate cuts were imminent this year or suggesting that rates had reached their peak, as he had previously stated, and stocks subsequently reversed course.

Powell's guidance is unlikely to dissuade market participants from continuing to place heavy emphasis on the game of data dependency. Market sentiment will remain highly sensitive to economic indicators that could drive shifts in monetary policy expectations. As investors assess incoming data and the Fed's anticipated response, stock movements are likely to reflect ongoing uncertainty and volatility.

At the end of the day, the global investment community is left betting on an extremely complicated set of hypotheticals where the landscape often feels like trying to decipher a complex puzzle with constantly shifting central bank policy pieces.

May's decision was no decision at all, as traders had ruled that out weeks ago. But in the context of the recent inflation overshoots, a June cut seems unlikely, but a hawkish revision to Summary of Economic Projections still seems odds on

Consecutive significant downside misses on Non-Farm Payrolls (NFP) prints or an unexpected abrupt downturn in inflation gauges would be necessary to keep the 2024 dot unchanged next month. However, such developments are unlikely. Barring any sudden deterioration in the labour market, which seems improbable, next month's SEP update will likely show a shift upward in this year's dot plot marker by 25 basis points, and possibly even by 50 basis points.

Forex

As expected, Japan's Ministry of Finance, via the Bank of Japan, was back selling US dollars to stabilize the Yen. Indeed, the Japanese government is digging into their sizable 1.2 trillion USD war chest, looking to take profit on the dollar they bought back in 2000. If they commit to an intervention regime, it will likely placate Yen bears from chasing USDJPY flights of fancy higher than recent tops.

As we suggested from the onset, the idea was to stabilize the JPY, where 155-157 USDJPY would likely be a great spot for the MOF to park and buy time for the Fed to eventually cut rates.

Of course with Japan’s TONA at 0-.1% while SOFR is effectively 5.3%, everyone knows this is a tough battle to win. However, when a currency crisis looms, central banks will huddle as the last thing the global and especially the ASEAN economy needs is for the Yen to go unhinged.