Asian stocks retreated after concerns about lofty valuations and mixed signals from Federal Reserve officials on rate cuts stalled a record-breaking rally on Wall Street.
MSCI’s equity gauge for the region fell 0.3% with South Korean stocks leading the losses. That came after the S&P 500 dropped for a third session, the longest slide in a month. Daiichi Sankyo Co. and Takeda Pharmaceutical Co. were among the losers after President Donald Trump proposed 100% levy on branded, patented pharma products. The dollar held its gains and the yen edged lower, hovering near the 150-a-dollar level.
S&P 500 futures pared earlier gains to trade little changed after Trump announced a 25% tariff on truck imports from Oct. 1.
After a $15 trillion rebound in global equities from April’s lows, traders now face a wall of uncertainty as tariff headlines return to weigh on markets. The Fed’s next policy move, a pivotal earnings season, and the threat of a US government shutdown are also weighing on sentiment. Attention now turns to Friday’s inflation report after the strong GDP data complicated the outlook for further easing after last week’s Fed rate cut.
“This refreshed threat on pharma has been brought up by Trump several times as a negotiation tool,” said Anna Wu, cross-asset strategist at VanEck Associates Corp. in Sydney. “I expect this to weigh on the health care sector and broader sentiment in global equities, including Asian markets.”
Short-end Treasury yields rose Thursday after data showed US gross domestic product grew at the fastest pace in nearly two years.
Following the rally, the S&P 500’s 12-month forward price-to-earnings ratio recently touched a high of 22.9, a level that this century was exceeded in just two prior instances: the dot-com bust and the pandemic rally in the summer of 2020 when the Fed reduced rates to near zero.
“We agree that the economy is strong and growing,” said Chris Zaccarelli at Northlight Asset Management, “but a lot of that good news is already priced in. Where we have our largest concern is with valuations.”
Money markets slightly reduced bets on rate cuts after the GDP data, projecting about 40 basis points of Fed reductions before the year is over. Divisions within the Fed over the path of rates added to the uncertainty.
Fed Governor Stephen Miran said the US central bank risks damage to the economy by not moving rapidly to lower interest rates, dissenting against the decision to lower rates last week by a quarter percentage point, favoring a half-point cut.
“I don’t think the economy is about to crater,” Miran said Thursday on Bloomberg Surveillance. But given the risks, “I would rather act proactively and lower rates as a result ahead of time, rather than wait for some giant catastrophe to occur,” he said.
Michelle Bowman, the Fed’s top bank cop, said inflation is close enough to the central bank’s target to justify more rate cuts because the job market is weakening.
Fed Bank of Chicago President Austan Goolsbee expressed continued concern about tariff-driven inflation and pushed back against any call for “front-loading” multiple rate cuts. His Kansas City counterpart Jeff Schmid signaled the central bank may not need to cut again soon.
Fed Bank of Dallas President Lorie Logan said the US central bank should abandon the federal funds rate as its benchmark in implementing monetary policy, and consider an overnight rate tied to the more robust market for loans collateralized by US Treasuries.
Investors will turn their focus to Friday’s inflation data. The Fed’s preferred gauge of underlying inflation likely grew at a slower pace last month, offering policymakers some breathing room to address jobs cooling.
A report on Friday is forecast to show the personal consumption expenditures price index excluding food and energy rose 0.2% in August, compared with 0.3% in July. On an annual basis, the so-called core measure is seen holding at a still-elevated 2.9%.
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