Equity markets across Asia edged lower on Wednesday as investors awaited further cues from U.S. Federal Reserve officials on the central bank’s monetary policy outlook.

Major indexes in Japan, Hong Kong and mainland China declined amid caution ahead of scheduled speeches by Fed Chair Jerome Powell and other central bank leaders this week. The comments could provide insight on how much further the Fed may raise interest rates to fight inflation.

Japan’s Nikkei 225 fell 1.2%, pulled down by bank stocks which dropped on declining bond yields. Chinese shares flip-flopped between small gains and losses after falling the previous day on weak trade data.

“Traders are cautiously waiting to hear from Fed officials this week, including Powell, to see how forcefully the central bank will push back against hopes of a policy pivot,” said Brian Chen, market analyst at Phillip Securities. “Their remarks hold potential to temper or even reverse the recent market optimism.”

Global Markets Eye Fed for Signs of Policy Shift

In recent weeks, world markets have rallied on hopes the Fed may slow its rapid pace of rate hikes soon and possibly pivot to cuts in 2023 to support growth. However, some analysts say expectations for a Fed pullback are premature given still high inflation.

“Investors are perched on the edge before the reality-checking speeches by Fed leaders,” said Hebe Chen of IG Markets Ltd. “Both Powell’s comments and China’s inflation data tomorrow could scrutinize, even reverse, the recent market euphoria.”

Markets expect Powell and other officials will push back against anticipations of an imminent policy easing. But bond yields have continued falling, indicating persistent doubts over the Fed’s hawkish stance.

The yield on the benchmark 10-year U.S. Treasury note declined to near 4.6% on Tuesday, dropping over 100 basis points since mid-October. Falling yields reflect declining confidence in the Fed’s ability to stick to an aggressive tightening campaign amid economic risks.

Softer U.S. Inflation Drives Recession Worries

Easing inflationary pressures in the U.S. have supported expectations the Fed can downshift and avoid tipping the economy into recession.

The October consumer price index showed inflation slowing to 7.7% from 8.2% in September. Gasoline prices fell sharply while food inflation moderated. Core inflation also decelerated slightly.

“Softer U.S. inflation data coupled with a steep slide in oil prices have sparked recession worries rather than optimism about a Fed pullback,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

While lower inflation may allow the Fed leeway to slow hikes, the weakening economic outlook has fueled concerns. Risks of a downturn in China and Europe have also cast a shadow.

“Markets are growing anxious about recession risks with the global economy clearly losing steam,” Kichikawa said. “Stocks may struggle for clear direction until we get more clarity from the Fed and on whether economies can achieve a soft landing.”

China Stocks Whipsaw as Traders Await Policy Support Signals

Chinese shares swung between modest losses and gains as the market weighed disappointing trade numbers against hopes for economic relief measures after a top-level government meeting last week.

China’s exports and imports both shrank in October, far worse than forecast. This adds to fears around China’s economic slowdown as the government sticks to harsh COVID-19 restrictions and a property market crisis worsens.
However, beaten-down Chinese stocks may find relief if the Xi-Biden meeting next week eases tensions and Chinese officials shift to pro-growth policies, said Templeton Global Equity Investments.

“We believe Chinese equities are poised for recovery,” said Shaokai Fan, Templeton Investment’s China CIO. “Valuations remain attractive while stabilizing regulations, potential easing measures and reopening over 2023 could provide a positive catalyst.”

Yen Flatlines, Dollar Steady as Markets Tread Water

The U.S. dollar stabilized following gains on Tuesday after bond yields rebounded. The policy-sensitive Japanese yen was little changed against the greenback. The yuan also held steady versus the dollar.

Safe-haven gold prices edged lower but remained above $1,700 an ounce. Analysts say gold could see renewed safety demand if markets grow anxious over Fed tightening leading to recession.

“The gold pullback seems corrective after its sharp rally through October,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. “Recession fears may send some investors back to haven assets like gold despite higher yields making it less attractive.”

With little clarity on policy ahead, analysts said markets may continue their listless drift in Asia on Thursday. Volatility will likely pick up once investors get more decisive signals from the Fed and upcoming economic data.

“Today seems set to be another quiet session as everyone awaits guidance from Powell and the other Fed speakers lined up,” said Kelvin Wong, market analyst at CMC Markets. “Their remarks and upcoming Chinese inflation figures may hold the key to breaking stocks out of their current stall.”