Weekly Market Update

In a historically clear speech, the Fed Chair noted that the healing of pandemic distortions and the Fed’s tightening worked together to swiftly reduce inflation in the past two years.

Rather than require a sharp rise in unemployment to push inflation lower as some have called for, he noted the economy’s ability to adapt to shocks: “As so often happens in times of crisis, Americans adapted and innovated.” The same could be said for much of the world to varying degrees.

Hearing Powell’s strong words, one could expect more of the same trifling debate: “will it be a 25 or 50 basis point rate cut” at the September 18 FOMC meeting?

Powell’s “dovish” speech might mean a larger cut. Yet counter-intuitively, Powell’s strong commitment to protect the expansion resulted in incremental strength for risk assets — driven by greater confidence in the growth outlook — than declines in short-term yields.

After the Chair’s speech, very short-term Treasury bill yields rose and the futures contracts placed the odds of a 50 basis point rate cut as only slightly higher. Markets priced greater likelihood of an extended period of 25 basis point cuts through 2025.

The largest impact from Powell’s speech Friday was on world equity markets with broad US shares initially rising more than 1%, the US dollar and bond yields moderating. Both sovereign bond and corporate yields fell.

Traditionally, Emerging Markets (EM) in Asia react positively to rate cuts by the Fed, especially if not associated with a US recession. Stable global demand growth and more ample USD liquidity tends to boost growth in the region and attract capital inflows from both bond and equity investors.

However, this cycle, two overhangs may complicate the story and diminish the tailwind effect of Fed easing, namely China’s economic weakness and potential escalation of trade conflicts. This backdrop would favor markets with strong domestic growth momentum like India and markets with secular demand growth like Taiwan and Korea (along with Japan).

For markets that depend more on traditional industrial demand like Southeast Asia, the situation may be more neutral from a growth perspective.

With significant uncertainty from China and trade, equity investors are likely to prefer markets with more proven earnings growth. In 2024 so far, Asian equities performance had been largely consistent with forward EPS revisions.

Markets with significant semiconductor component like Taiwan and Japan got the largest upward revisions and top performance. Korea’s performance was weaker as its semiconductor industry was not as competitive, while its heavy industrial sector suffered from poor demand.

Similarly, India remains the market seeing the highest economic growth, with strong upward revisions. These markets may remain investor favorites if US rate cuts bring more interest in Asia.