While Asia markets may cheer a Fed pause, watchers are split on growth prospects

While a pause in the U.S. Federal Reserve’s rate-hike cycle would lead to stronger Asian currencies, the region’s recent earnings and disappointing Chinese economic data leave watchers split on the growth outlook.

After the Fed raised interest rates last week in a move widely expected to be its last in its fight to bring inflation down, currencies in the Asia-Pacific cheered a potential pivot ahead as the dollar index declined.

As of Monday morning in Asia, market pricing showed a more than 90% probability of a pause in the Fed’s June meeting, according to the CME’s FedWatch Tool which uses Fed funds futures contracts as a guide. Traders priced in less than a 10% chance of a quarter-point increase.

A Fed pause could boost U.S. stocks, but its effect on regional growth in Asia may not be as straightforward.

“The Fed may be ‘done’ for now but all the DM [developed market] central banks are not,” Manishi Raychaudhuri, BNP Paribas’ Asia-Pacific head of equity research, said in a Saturday note.

“While Asian currency stabilization is potentially good news for foreign flows into Asian equities, in the near term, shifting sands in the Chinese economic landscape could be the stronger driver of Asian equities, we think,” he wrote. He pointed to a disappointing earnings season in Asia, with every sector except consumer discretionary and technology missing consensus estimates.

Nomura’s equity strategists kept their views for Asia-Pacific stocks unchanged despite the likelihood of a potential Fed pause, maintaining its year-end target for MSCI Asia ex-Japan. Strategist Chetan Seth of Nomura added the risk of a recession in the U.S. looms, but the exact timing of a slowdown is hard to predict.

“Nonetheless, in our base case, we do not expect a meaningful decline in Asian stocks. Ultimately, we think any weakness in Asian stocks due to U.S. recession concerns will be an opportunity for investors to raise exposure to Asian stocks due to still-supportive local factors,” Nomura strategists wrote in a Sunday note.

UBS Global Wealth Management meanwhile pointed to central banks in Asia finally seeing relief from pressure to keep up with the Federal Reserve’s rate hikes.

“The peaking of U.S. interest rates is a key turning point that should open the door for Asia to begin easing, with scope for rate cuts of 25–50bps already in place in certain economies,” UBS said in its May monthly outlook report, naming the central banks of South Korea, Indonesia and India as likely candidates to pivot into an easing cycle.