Asian stock markets are gearing up for a tentative start following a slight downturn in US equities and a significant sell-off in Treasuries, triggered by robust US manufacturing data. This development has fueled beliefs that the Federal Reserve might delay interest rate cuts.
Futures in Japan saw a modest uptick early Tuesday, buoyed by a depreciating yen, while markets in Australia and Hong Kong are set to reopen after public holidays. The S&P 500 experienced a minor decline of 0.2%, whereas the Nasdaq managed a similar percentage increase during Monday's trading session.
Monday witnessed a broad decline in Treasuries, with yields on 10-year notes jumping over 10 basis points. This was after manufacturing data surprisingly showed expansion for the first time since September 2022, alongside a rise in input costs. Consequently, the expected Federal Reserve easing reflected in swap contracts for the year decreased to approximately 65 basis points, below what policymakers had anticipated. This news also dampened the momentum in equities, following a fifth consecutive month of gains for the S&P 500.
In parallel, Australian 10-year yields mirrored the upward movement of their US counterparts, increasing by 12 basis points in early Tuesday trades.
Jose Torres from Interactive Brokers highlighted that investors might be anticipating a more hawkish stance from the Fed, with the first rate cut possibly occurring in the latter half of the year, nearing a 50-50 chance in June.
Upcoming reports are expected to indicate continued employment growth in March and a moderation in wage increases. Fed Chair Jerome Powell, scheduled to speak on Wednesday, has stated the necessity for more evidence of price containment.
The yen stabilized in early Tuesday trading after weakening towards 152 against the dollar on Monday, raising speculation about potential market intervention by Japanese officials.
The dollar appreciated, while oil and gold prices saw increases amid escalating tensions in the Middle East following an Israeli attack in Syria.
Despite attributing the market movement to the manufacturing data release, Ian Lyngen and Vail Hartman of BMO Capital Markets noted that a bond sell-off had already commenced prior to the announcement.
The Institute for Supply Management's manufacturing index rose to 50.3 last month, marking an end to 16 consecutive months of contraction. Additionally, the price index surged to 55.8, its highest since July 2022, suggesting a reversal of some temporary deflationary pressures, as pointed out by Michael Shaoul of Marketfield Asset Management.
Key data releases in Asia, including South Korean inflation figures, Reserve Bank of Australia's meeting minutes, and Indian PMIs, are scheduled for Tuesday.
On the US front, the market is preparing for potential volatility following a strong performance, with little concern for price corrections reflected in the cost dynamics of S&P 500 options.
Goldman Sachs analysts, led by Ryan Hammond, commented that overvaluation does not necessarily predict immediate market downturns, especially if supported by a healthy economic growth environment.
Significant global and US economic events and data releases are lined up for the week, including manufacturing PMIs, factory orders, employment reports, and speeches by various Federal Reserve officials.
