Asian Stocks Rebound

Stock Market Performance

　　The MSCI Asia Pacific Index rose by 0.5% after falling over 2% on Wednesday, marking its largest drop since August 5. South Korea's Kospi Index surged more than 1%, driven primarily by a rebound in chipmaker stocks. Japanese benchmarks fluctuated due to the yen's strength.

　　Image Source: chinatimes

Bond Market Dynamics

　　The yield on 10-year US Treasuries remained stable after a decline of eight basis points. A slowdown in the US labor market has increased expectations for substantial rate cuts by the Federal Reserve. The dollar strength index fell 0.3% on Wednesday, supporting gains in Australian and New Zealand bonds.

　　Global financial markets have shown exaggerated reactions to US economic data due to growing doubts about the Fed's ability to achieve a soft landing. Skepticism over artificial intelligence hype has also impacted risk assets, with Nvidia experiencing its worst two-day plunge since October 2022. Focus now shifts to the US employment data set to be released this Friday, a crucial indicator before the Fed's decision later this month.

Economic Outlook and Market Dynamics

　　E*Trade's Chris Larkin noted, “While the markets nervousness is less than a month ago, there is still a wait for confirmation that the economy is not cooling too much.” However, data this week has yet to provide such confirmation.

　　In Asian trading, US futures edged higher after the S&P 500 and Nasdaq 100 each dropped 0.2% on Wednesday. The yen pared some of its earlier gains but may still support further rate hikes by the Bank of Japan due to an unexpected increase in real wages.

　　China is considering cutting rates on up to $5.3 trillion of mortgages to boost its weak real estate market and economy. JPMorgan Chase downgraded its recommendation on Chinese stocks, citing insufficient policy support and potential volatility related to the US presidential election. Claudio Irigoyen, head of global economics research at Bank of America, stated, “There is insufficient policy support, both monetary and fiscal.” He added, “Achieving the 5% growth target will be more difficult without more policy support.”

　　South Koreas Bank reported that the economy contracted in the second quarter as initially estimated. This has prompted policymakers to focus more on supporting growth momentum, as inflation has slowed in line with projections.

　　With the Fed set to begin cutting rates in a few weeks, the main question now is the size of the initial cut. Fridays US employment data will help determine this. Last month's jobs report raised concerns about economic growth, and Fed Chair Jerome Powell has indicated that the Fed is now more concerned about labor market risks than inflation.

　　Neil Dutta of Renaissance Macro Research commented, “Markets seem to see September's rate hike as a choice between 25 and 50 basis points.” He added, “A 25 basis point hike might trigger a similar market reaction as skipping the July meeting. It‘s better to hike 50 basis points when possible rather than wait until it’s necessary.”