Markets Respond To Fed’s Patience On Interest Rates; Inflation Data In Focus

Bond yields rose on Wednesday as Federal Reserve Chair Jerome Powell emphasized the need for patience before further interest rate cuts, while investors turned their attention to the upcoming US Consumer Price Index (CPI) data. In Hong Kong, stocks surged, led by notable gains in Alibaba and BYD, while equity index futures showed mixed movements ahead of the critical inflation report. Treasury yields edged lower following a decline across the yield curve on Tuesday. Notably, yields on Japan’s 5-year bonds climbed to 1% for the first time since 2008, with the yen continuing its downward trajectory amid tariff concerns.

As markets awaited the release of US CPI data, Powell, during his testimony to Congress, reiterated that the Fed’s current stance on interest rates reflects a strong economy and that there is no immediate need for aggressive rate cuts. This follows the Fed’s decision in January to leave its key policy rate unchanged, signaling that inflationary pressures remain persistent.

“Powell’s remarks have been met with little surprise,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “While the market had already discounted the possibility of a rapid rate cut, there is still room for easing later in the year should the economic conditions warrant it.”

The technology sector continued to buoy stocks in China and Hong Kong, with Alibaba Group Holdings surging 8.6%, its largest jump since September 2024, following reports of a new partnership with Apple Inc. to integrate AI features into Chinese products. The rally in Chinese stocks was further fueled by news surrounding DeepSeek’s AI app, prompting UBS strategists, including James Wang, to suggest that the rally is likely far from over. Analysts from Wall Street’s Morgan Stanley and JPMorgan Chase & Co. have echoed these optimistic sentiments.

In Europe, corporate earnings showed mixed results. ABN Amro Bank NV reported a profit below expectations, while Heineken NV exceeded beer volume estimates. Meanwhile, UK Chancellor Rachel Reeves faces growing pressure to implement spending cuts, as the country’s fiscal watchdog downgraded its economic growth forecast.

US Inflation Data in Focus

Traders are closely monitoring the release of the US CPI report, with expectations that it will show the core CPI—excluding food and energy—rose by 0.3% in January, marking its fifth increase in six months. The report, scheduled for release ahead of the second half of Powell’s testimony, could influence future Fed decisions, particularly after January’s robust jobs report led to a reassessment of the policy outlook.

Money markets are pricing in only one quarter-point rate cut by the Fed in 2025, with the possibility of another cut in September. While inflation remains a key concern, the economy’s strength, buoyed by solid job growth, has provided the central bank with the flexibility to hold off on immediate rate adjustments.

Meanwhile, in Asia, BYD Co. reached a new record high, reflecting optimism that the Chinese electric vehicle giant is set to challenge competitors like Tesla with its smart-driving initiatives.

The Japanese yen continued to slide, facing its longest losing streak in over a month amid rising concerns that Japan may be included in President Trump’s proposed tariff plan. The yen fell by 0.8%, making it the worst-performing currency among the Group-of-10 peers. In response, Japan’s government has requested an exemption from the new tariffs.

“The risk that Japan could face tariffs is genuine, and this could complicate the yen’s near-term outlook,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. in Singapore.

Currency and Commodities Update

In currency markets, India’s rupee extended its gains after a sharp rally on Tuesday, attributed to strong central bank intervention. Conversely, Vietnam’s dong fell to a record low against the US dollar.

In commodities, oil prices edged lower following an industry report indicating a significant rise in US crude stockpiles. Gold also fell for the second consecutive day after a volatile trading session, despite having surged to a new high above $2,942 earlier in the week.