(December 19): Heavy selling in US stocks and bonds spread to Asia Thursday after the Federal Reserve trimmed expectations for rate cuts next year.

Equity futures for Japan, Australia and Hong Kong pointed to markets opening lower after the S&P 500 suffered its worst day since August and biggest loss the day of a Fed decision since 2001. The tech-heavy Nasdaq 100 dropped 3.6%, its second-worst day this year and sharpest decline since July.

Treasury yields lurched higher across the curve, adding more than 10 basis points to the policy-sensitive two-year yield and the 10-year yield, which closed above 4.5% for the first time since May.

The move jolted an index of the dollar almost 1% higher to a level not seen since 2022 as the greenback strengthened against major currencies. The yen was steady after falling Wednesday, ahead of a Bank of Japan meeting where it is expected to keep rates on hold.

“The combination of higher yields and the surging US dollar should see Asian markets open 1.5-2% lower, with the weaker JPY providing a cushion to dampen falls in the Nikkei,” said Tony Sycamore, an analyst at IG in Sydney.

Australian yields rose early Thursday, echoing the selling in Treasuries, while those for New Zealand declined as the country’s economy fell into recession after contracting more than expected in the third quarter.

The last time the S&P 500 saw losses of the magnitude on Fed’s decision day was on Sept. 17, 2001, when the index fell nearly 5%. It fell 12% on March 16, 2020, a day after the Fed’s emergency weekend meeting during the pandemic.

The Fed cut rates 25 basis points on Wednesday as expected, but issued quarterly forecasts showing several officials expect fewer rate cuts in 2025 than previously estimated. The median estimate shows the benchmark rate falling to 3.75% to 4% by the end of next year, the equivalent of two quarter-point reductions.

Fed Chair Jerome Powell said the central bank would be more cautious as it considers further adjustments to the policy rate, noting the Fed is committed to reaching its 2% inflation target. “We need to see progress on inflation,” he said. “We moved quickly to get to here but moving forward we are moving slower.”

Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, called Powell “a hawk in dove’s clothing.”

 “Despite playing down the recent slowdown in disinflation while boasting about the strength of economic momentum, he still hinted that tariffs won’t be written off as transitory and that the two-cut forecast for 2025 is necessary because policy must remain restrictive,” he said.

Whitney Watson of Goldman Sachs Asset Management expects the Fed to skip a rate cut in January before resuming on its easing path in March.

“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” said Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at the firm.

Elsewhere, the prospect of a US government shutdown re-emerged. President-elect Donald Trump told Fox News he was “totally against” a proposed government funding bill, threatening a stopgap measure that would keep the government open until mid-March. If the bill fails, the government could see a partial shutdown as early as Saturday.

The Fed’s Wednesday cut precedes a busy run of central bank announcements from around the world. Rate decisions are expected Thursday in Japan, the Philippines, Taiwan, the UK, Norway, Sweden and Mexico. China’s one-year Medium-Term Lending Facility rate may be announced at any time thourgh December 24.

In commodities, gold fell 2.3% Wednesday while West Texas Intermediate, the US oil price, rose 0.7% to above $70.50.

  - Bloomberg