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Japan, Australia Stocks Falter Ahead of Fed Rate Decision

Japanese and Australian stocks were in the red on Wednesday to head a weakness in Asian markets, weighed by increased concerns over the Federal Reserve extending the period of higher interest rates when it ends its two-day meeting later in the day.

The Nikkei 225 index fell 0.13%, while the broader TOPIX index dropped 0.32%. The indexes’ heavyweights also followed overnight declines in their US counterparts.

Through April, the Nikkei 225 was Asia’s biggest underperformer, as uncertainty over the Japanese economy and the Bank of Japan (BOJ) prompted traders to lock in gains after the country’s premier index logged record highs in March.

Adding to Japan’s equity woes was volatility in the yen, which bounced back on Monday after hitting its lowest levels since 1990 of 156.82 per dollar a few hours earlier in the day. The sharp jump sparked speculations of a possible intervention from the Japanese government.

A higher yen gradually reduces earnings among companies in Japan, and a significant part of those profits rely on exports.

However, sentiment was limited as traders expected further intervention from Japanese authorities on Tuesday, as the safe-haven currency stumbled to return to record lows reached in April.

In Australia, the S&P/ASX 200 index slipped 0.99% on Wednesday, with traders staying wary over increased expectations of more interest rate hikes by the Reserve Bank of Australia (RBA) amid stubbornly high inflation.

Analysts now see two more rate hikes from the RBA after data from the Australian Bureau of Statistics (ABS) showed that the consumer price index (CPI) climbed 1% in the first quarter, exceeding market estimates of 0.8%.

The RBA will have its policy meeting on May 6 to 7. The central bank is seen leaving rates steady for now, although it might strengthen its hawkish statement.

Other Asian stock markets were closed in observation of the Labor Day holiday, which also resulted in thin trading.

Fed Meeting to Wrap Up, Interest Rate Decision in Focus

Broader markets were closely watching the Fed’s meeting later Wednesday, which is largely expected to close with an announcement of the benchmark interest rate being unchanged between 5.25%-5.50%.

However, Fed Chair Jerome Powell might provide additional hawkish cues, especially following recent inflation readings coming in above forecasts, with the latest one being the Employment Cost Index (ECI) rising 1.2% in the first quarter from the fourth quarter’s 0.9% growth.

Powell reiterated two weeks earlier at the Federal Open Market Committee (FOMC) that they needed more certainty that inflation was approaching their 2% target before they could ease policy.

CME Group Inc.’s popular FedWatch tool now anticipates about a 50% probability the central bank will have its first rate cut as soon as September and a reduction of one quarter percentage point by the end of this year.

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