China hits five-year lows and Asian equities become cautious as chances of a rate cut fade

While the Federal Reserve's early interest rate cut expectations were further tarnished by stronger U.S. data on Thursday, most Asian equities stayed within a narrow range. Meanwhile, a steep decline in Chinese shares deepened in the aftermath of weak GDP statistics.

Wall Street led the way weakly into regional markets, as traders significantly reduced their bets on a rate drop in March despite stronger-than-expected retail sales data.

The results supported remarks made by Fed officials that, given the relative strength of the economy, U.S. interest rates will be higher for an extended period of time. In the short run, foreign capital inflows to Asian equities are probably going to be restricted in such a situation, which is not good news for risk-driven markets.

Following statistics from the previous day that indicated Asia's largest economy expanded less than projected in the fourth quarter, Thursday's losses signalled a widening meltdown in Chinese markets.

The GDP narrowly exceeded the government's yearly 5% objective, with the majority of the growth solely attributable to a lower 2022 base for comparison. The data showed that China's economy was still weakening after the post-COVID recovery mainly fizzled out in 2023.

For most of 2023, Chinese equities continued to plummet, ending up as the worst-performing in all of Asia. Recent sessions saw little improvement in this trend, and the mood was further soured by Beijing's unwillingness to release further stimulus.

Among one or two exceptions were the Japanese markets, where the Nikkei 225 and TOPIX increased by around 0.5% and 0.2%, respectively. Following their explosive rise to 34-year highs earlier in the week, both indexes were suffering two straight days of losses.

The Bank of Japan will not likely be very motivated to start tightening its ultra-dovish policy if the consumer inflation data for Japan, which is scheduled out this Friday, continues to show a downward trend in inflation.

(Sources: investing.com, reuters.com)