San Francisco Frontiers - Stock markets down as traders fret over rate cut outlook

With Wall Street closed Monday for a holiday, there were few catalysts to drive buying, while analysts warned investors might have overdone their optimism about how much the US central bank will loosen monetary policy this year.

Equities soared at the end of 2023 as several reports showed inflation coming down and the jobs market softening while the Fed indicated that it was preparing to reverse more than a year of hiking.

Bets had been building that officials would announce a rate reduction as soon as March.

However, January has seen the wind come out of the sails after minutes from the central bank's December meeting showed decision-makers keen to keep rates elevated for some time, while a closely watched employment report smashed forecasts and consumer prices rose more than expected.

"The current market pricing indicates anticipation of nearly seven rate cuts in 2024, driven by the belief that the disinflation process is firmly entrenched and unlikely to be easily dislodged," said Stephen Innes at SPI Asset Management.

"It's essential to recall that the market consistently underestimated the Federal Reserve's willingness to raise rates during the hiking cycle.

"So this prompts a straightforward question: Is the market now overestimating the Fed's readiness or capacity, particularly in the context of prevailing inflation dynamics, to implement rate cuts over the next 12 months?"

While inflation is on a general downward path, there is a worry that it could pop back up anytime, particularly with tensions in the oil-rich Middle East showing no sign of calming.

The United States and Britain have in recent days launched strikes against Yemen's Huthis in retaliation for the Iran-backed rebels' attacks on Red Sea shipping in what they say is solidarity with Gaza.

The strikes have been met with warnings of retaliation from the group, which on Monday hit a US-owned cargo vessel with a missile, heightening fears that a region-wide conflict could erupt, battering supplies of oil and other goods.

Still, after an initial burst higher Friday, oil prices remain subdued owing to demand worries as the global economy -- particularly China's -- struggles.

Investors are now awaiting the release this week of US data on retail sales, industrial production and jobs, among other things.

Asian markets mostly fell Tuesday, with Tokyo suffering a small drop after six straight gains that saw the Nikkei burst to a 34-year high thanks to rising inflation and a weak yen that helps exporters.

Hong Kong tumbled more than two percent ahead of data on Chinese economic growth and retail sales due Wednesday. Shanghai edged up.

There were also losses in Sydney, Seoul, Singapore, Bangkok, Mumbai, Wellington, Taipei and Manila.

London, Paris and Frankfurt sank at the open, extending Monday's losses that came after data showed the continent's biggest economy Germany shrank slightly in 2023 as costly energy, high interest rates and cooling foreign demand took their toll.

Warnings from European Central Bank officials that it was too early to talk about rate cuts added to the gloom.

- Key figures around 0810 GMT -

Tokyo - Nikkei 225: DOWN 0.8 percent at 35,619.18 (close)

Hong Kong - Hang Seng Index: DOWN 2.2 percent at 15,865.92 (close)

Shanghai - Composite: UP 0.3 percent at 2,893.99 (close)

London - FTSE 100: DOWN 0.7 percent at 7,541.96

West Texas Intermediate: DOWN 0.4 percent at $72.41 per barrel

Brent North Sea Crude: FLAT at $78.13 per barrel

Dollar/yen: UP at 146.16 yen from 145.77 yen on Monday

Euro/dollar: DOWN at $1.0911 from $1.0952

Pound/dollar: DOWN at $1.2666 from $1.2737

Euro/pound: UP at 86.15 pence from 85.98 pence

New York - Dow: Closed for a public holiday

V.Mitchell--SFF