Asian stocks rose on Wednesday after Wall Street set a new record after Federal Reserve Chairman Jerome Powell stoked hopes of an interest rate cut by saying “progress” was being made in the fight against inflation and the job market was cooling.
The comments brought fresh optimism that one or even two rate cuts could be delivered by the end of the year, after a string of better-than-expected data prompted central bankers to warn that monetary policy would remain elevated for the time being.
But that wasn’t enough to lift the euro against the dollar as traders worried that France’s weekend elections could bring far-right forces to power, with some warning that would put the European Union’s second-largest economy at odds with the EU.
“With the labor market remaining strong and economic growth underway, the Fed has made significant progress in lowering inflation to our (2 percent) objective,” Powell said at a central banking forum in Portugal.
“We want that process to continue.”
He also cited “substantial” efforts to ease the labor market, a key goal of policymakers. A key nonfarm payrolls report will be closely watched on Friday, but investors are hoping a slowdown in hiring will give the Fed more room to cut interest rates.
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Powell said the 2% target could be reached “probably late next year” or in 2026. The consumer price index hit 3.3% in May and is on track to peak above 9% in 2022, the highest level in 40 years.
Futures traders see about a 70% chance of a rate cut by mid-September, but see a second cut by the end of the year as more likely, according to CME Group data.
Hopes that borrowing costs will finally fall from 23-year highs within months helped rally stocks on Wall Street, with the S&P surpassing 5,500 points for the first time and the Nasdaq closing at a record high.
Gains continued in Asia, with Tokyo, Hong Kong, Sydney, Seoul, Singapore, Taipei, Manila and Jakarta all rising, while Shanghai fell.
In foreign exchange markets, the euro failed to maintain momentum against the dollar after rising earlier this week after a first round of French parliamentary voting on Sunday suggested far-right parties might not win enough seats to secure a majority.
There are fears that if Marine Le Pen’s National Rally (RN) party wins the second round of voting this weekend, it will present budget proposals that could create a rift with Brussels and throw the EU into new uncertainty.
But analysts have warned investors to be cautious as President Emmanuel Macron’s centre-right and left-wing parties jockey to block RN.
“If Macron’s centrist coalition decides to support a far-left coalition, […] It may allow [them] “It’s easier to campaign for more aggressive spending policies and tax cuts in the French parliament than it is for the far right,” said Kelvin Wong of OANDA.
He added that this meant “France’s excess deficit last year was 5.5 percent, above the EU’s benchmark deficit limit of 3 percent, and is likely to widen further.”
