Asian stocks decline as expectations for rate cuts diminish.

Asian stocks took a hit today as the unexpected surge in U.S. nonfarm payrolls forced investors to reassess their predictions for imminent interest rate cuts. Now, all eyes are on the upcoming series of crucial inflation reports scheduled for this week, as markets eagerly await further insights.

Regional stocks were influenced by the underwhelming performance of Wall Street, as the release of the nonfarm payrolls data for December, which exceeded expectations, led to a reduction in speculations that the Federal Reserve would implement interest rate cuts as early as March 2024. Additionally, traders remained on edge due to the anticipation surrounding the upcoming fourth-quarter earnings season.

In Asian trade on Monday, U.S. stock futures remained relatively unchanged. However, trading volumes in the region were slightly subdued due to a market holiday in Japan. The Nikkei 225 Futures showed minimal movement. The attention has now shifted towards the upcoming Tokyo inflation readings for December, which are scheduled to be released on Tuesday.

The seismic impact of a destructive earthquake in central Japan has also shaken confidence in Japanese markets. The aftermath of the devastation, which requires substantial spending and rebuilding, is anticipated to cause a significant delay in the Bank of Japan's implementation of its ultra-loose monetary policy.

Asian stock markets, including broader indexes, remained within a narrow range. The ASX 200 in Australia experienced a slight decline ahead of the release of inflation, trade, and retail sales data later this week.

The Shanghai Shenzhen CSI 300 and SSEC indexes in China experienced a decline of 0.7% and 0.8% respectively. This downward trend further adds to their losses since the beginning of the year, indicating a prevailing sense of pessimism towards the country. The upcoming release of inflation and trade data later this week is anticipated to reveal the ongoing fragility of the Chinese economy, which is consistent with the disappointing readings of the purchasing managers index for December.

The Hang Seng index in Hong Kong experienced a decline of 1.1%, primarily due to the negative performance of mainland stocks.

Ahead of the Bank of Korea's interest rate decision later this week, South Korea's KOSPI remained unchanged. Meanwhile, futures for India's Nifty 50 index indicated a subdued opening, as the South Asian economy's inflation readings are also scheduled to be released later this week.

In the initial trading week of 2024, Asian markets experienced a decline, primarily driven by increasing uncertainties regarding the Federal Reserve's potential interest rate reduction in March. Additionally, attention in India was directed towards the upcoming earnings reports of prominent index heavyweights, namely Infosys Ltd (NS: INFY) and Wipro Ltd (NS: WIPR), scheduled for later this week.

The ongoing Israel-Hamas war, with no signs of de-escalation, continued to dampen the overall sentiment towards risk-driven assets. Additionally, persistent concerns regarding the conflict in the Middle East further contributed to this cautious outlook.

This week, markets will be put to the test as they await inflation reports from various major Asian economies. However, the main focus will be on the release of the U.S. consumer price index data for December, which is scheduled for Thursday.

The upcoming reading is anticipated to indicate a slight increase in U.S. inflation, with the CPI index projected to remain significantly above the Federal Reserve's annual target of 2%. Furthermore, there is an expectation for month-on-month inflation to accelerate.

It is worth noting that this inflation reading follows closely after the release of nonfarm payroll data, which indicated minimal cooling in the labour market. Analysts at ING have suggested that this data reduces the urgency for the Fed to implement aggressive policy loosening measures, and they anticipate that any rate cuts will likely commence in May.

According to the CME Fedwatch tool, traders are currently pricing in an approximately 63% probability of a 25 basis point rate cut in March. This is a decrease from the 73.4% probability observed one week earlier.