Navigating the Fed’s pivot

The US Federal Reserve (Fed) cut the Fed Funds rate 25bps to 4.00% - 4.25% and continued its balance sheet runoff, as expected. However, it surprised by increasing guidance for future cuts in this cycle by 25bps. We expect the Fed to cut 25bps at its October and December meetings. The extent to which the Fed cuts in 2026 will depend on how much weakness emerges in the US labour market, but our base case is for 50bps – 75bps of further cuts next year.

To be sure, the quarterly “dot plot” of FOMC participant forecasts now suggests two more cuts by the end of this year and a Fed Funds rate of 3.38% by end-2026 (a range of 3.25% - 3.50%). President Trump’s new appointee to a Fed Governorship, Steven Miran voted for a 50bps cut at the meeting although Chairman Powell said during the post-meeting press conference that 50bps was not widely considered at the meeting.

Chairman Powell’s most notable comment for us was his statement that the Fed does not want any further weakness in the US labour market. We think this reveals a clear willingness to live with inflation of close to 3% in order to try to keep the US unemployment rate below 4.5%, a level that is historically still very low.

One key implication of the resumption of the Fed’s cutting cycle is that it should create room for further policy rate cuts from Asian central banks. Bank Indonesia anticipated the Fed cut with a surprise 25bps rate cut of its own yesterday. Rate cuts in Asia should increasingly stimulate Asian domestic demand growth, offsetting some of the likely weakness in export growth over the next couple of quarters.

Fig. Forecasts for Asian policy rate changes %

Source: Eastspring Investments. September 2025.

We also continue to think the resumption of Fed interest rate cuts despite an outlook for higher US inflation will weaken the USD. We expect another 2% - 3% of USD depreciation vs. the major currencies. This should push most Asian currencies stronger against the dollar, stimulating foreign investment flows into the region.

Surprise strength in the US labour market is the main risk we see to our outlook. If US employment growth rebounds in the coming months and the unemployment rate does not rise, markets would need to reduce pricing for Fed rate cuts, reducing the incentive for USD depreciation.

Multi Asset

Our Multi-Asset Portfolio Solutions team had anticipated slowing US growth momentum and a cooling labour market since early April, hence maintaining a positive stance on US duration (US bonds) to reflect this view. Since Liberation Day, markets have been concerned about tariff-induced inflation and the US fiscal position, which had kept US yields elevated until recently.

As recession risks and inflation concerns lingered, the team had complemented the long US duration position with a long position in inflation-linked US Treasuries (i.e. TIPS) to allow portfolios to benefit from a narrowing in US real yields should the tariff-led inflation be greater than anticipated. However given the recent labour market weakness, the team now sees the risk reward trade-off on US Treasuries as less compelling. The team continues to view risk assets - such as US equities and credit - as richly valued with limited safety margins. While a US recession is not expected and Fed easing should support the US economy, growth could still slow more than anticipated.

With yields expected to decline and the US dollar likely to weaken further, global investors are increasingly seeking diversification (beyond US assets), income and resilience. In this environment, Emerging Markets (EM), Asia, and markets with more attractive valuations are well-positioned to capture these investment flows. The team has recently turned more constructive on EM/Asian equities.

Fixed Income

Our Asia Fixed Income team remains highly agile in the volatile environment and are on the look-out for opportunities to add duration on dips. Strong liquidity conditions suggest that any market corrections are likely to be short-lived and should present rebalancing and new investment opportunities.

With historically tight credit spreads, credit selection will be key to navigating the markets. Asian corporate fundamentals remain relatively healthy although some companies may experience weaker margins given slowing growth. Although default rates in Asia are likely to stay low, we prefer to stay defensively positioned within investment grade credits. Given investors’ hunt for yield, we would view any spread widening as an opportunity to re-engage. Further potential USD weakness could benefit emerging and Asian currencies, and drive diversification flows into non-USD bond markets.

Yields of Asia local currency bonds have rallied over the last three months, yet selective opportunities remain from a USD-hedged perspective, driven by the pickup in carry and low bond issuance. We see opportunities in Indian government bonds as valuations have become more attractive, and the rupee has cheapened. However, greater clarity on India’s trade-related headwinds would be needed before adding exposures. Philippines government bonds offer interesting opportunities given its high yield, supportive macros and the central bank’s easing bias. Meanwhile, Malaysia government bonds offer low volatility and compare favourably against the other low yielding sovereigns. Security selection is key given the idiosyncratic risks across the region.

Singapore dollar (SGD) bonds should continue to be supported by the still-resilient Singapore economy and benign inflation. With fiscal discipline under increasing pressure in various parts of Asia as well as in the developed markets, Singapore’s robust fiscal framework has reinforced the appeal of SGD-denominated bonds, helping the Singapore bond market deliver strong returns to date. Moderate issuance and positive technicals are likely to continue to underpin SGD corporate bonds. The valuations of SGD credits and selected statutory board bonds appear relatively more attractive, having lagged the rally in Singapore government bonds.