Asian stocks subdued ahead of Fed, frail yen in focus

Asian stocks edged higher on Wednesday ahead of a keenly awaited policy decision from the Federal Reserve later in the day, while the yen was stuck near one-year lows against the dollar as Tokyo ramped up intervention warnings.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was 0.14% higher. The index has clocked three straight months of losses. Japan's Nikkei .N225 was 2% higher.

European stocks looked set to open on a surer footing, with the Eurostoxx 50 futures STXEc1 up 0.34%, German DAX futures FDXc1 up 0.37% and FTSE futures FFIc1 0.27% higher.

The spotlight on Wednesday will firmly be on the Federal Reserve's policy decision, with the central bank widely expected to hold rates steady. Comments from Fed Chair Jerome Powell will be scrutinized to gauge where interest rates are headed and how long they will stay higher.

Erik Weisman, chief economist and portfolio manager at MFS Investment Management, said the Fed will keep the option of future rate hikes firmly on the table until the labour market cools considerably and inflationary pressures ease.

"Chairman Powell will also argue that the lagged effects of past hikes have not fully impacted the economy and that patience is prudent."

Markets are pricing in a 29% chance of a 25 basis point hike in December and a 35% chance of a 25 bps hike in January, the CME FedWatch tool showed.

Treasury yields remained elevated, with the yield on 10-year Treasury notes US10YT=RR up 4.5 basis points to 4.920%. The yield on the 30-year Treasury bond US30YT=RR was up 5.4 basis points to 5.078%.

The two-year US2YT=RR US Treasury yield, which typically moves in step with interest rate expectations, was up 1.2 basis points at 5.083%.

Claudio Irigoyen, global head of economics at BofA Global Research, said the most important question for the next three to five years in the discussion about US fiscal policy is whether interest rates will go back to pre-pandemic levels.

"Or if this is a new regime of higher real interest rate," Irigoyen said. "And I think that I am more on the camp of the second option."

US Fed likely to hold rates again despite strong economic growth

YEN VIGIL

Market focus in Asia was firmly on the yen in the wake of the Bank of Japan's decision to tweak its bond yield control policy again on Tuesday, further loosening its grip on long-term interest rates.

The move drove a broad slide in the yen JPY=EBS on Tuesday, tumbling to a one-year low against the dollar and touching a 15-year low against the euro as investors had expected a bigger BOJ step towards ending years of massive monetary stimulus.

"The market has seen the tweak to a flexible regime as clear dovish development," said Chris Weston, head of research at Pepperstone.

"Once again market players have been left frustrated by the lack of urgency shown by the BOJ, and either closed yen longs or flipped into outright yen shorts."

The sharp drop in the yen prompted a fresh and sterner warning from Japan's top currency diplomat Masato Kanda that authorities were on standby to respond to recent "one-sided, sharp" moves in the currency.

The yen strengthened 0.24% to 151.31 per dollar following the comments but remained close to one-year lows of 151.74 it hit on Tuesday and the three-decade low of 151.94 touched last year, which triggered an intervention by Tokyo at the time.

Against a basket of currencies, the dollar =USD was up 0.075% at 106.75. Sterling GBP=D3 was last at $1.2135, down 0.16% on the day.

China shares .SSEC was up 0.14%, while the Hong Kong's Hang Seng Index .HSI eased 0.09%.

Data on Wednesday showed Asia's manufacturers faced worsening pressure in October with factory activity in China slipping back into decline, clouding recovery prospects for the region's major exporters already squeezed by weaker global demand and higher prices.

Oil prices inched higher ahead of the Fed decision, with the market keeping a close eye on the latest developments in the Israel-Hamas conflict.

US crude CLc1 rose 0.07% to $81.08 per barrel and Brent LCOc1 was at $85.20, up 0.21% on the day.