SINGAPORE: Stocks sagged in cautious trade on Wednesday, while the dollar paused its recent decline as expectations for an imminent peak in the Federal Reserve’s interest rate cycle edged ahead of U.S. banking sector concerns.

MSCI’s index of Asia shares outside Japan (.MIAPJ0000PUS) dropped 0.4% to retreat further from Monday’s two-month high, and Japan’s Nikkei (.N225) looked set to snap an eight-day winning streak with a modest 0.3% loss.

S&P 500 futures fell 0.2% and European and FTSE futures were flat, ahead of British and European inflation data and Tesla earnings figures due later in the day.

Morgan Stanley (MS.N) also reports, on the heels of solid earnings at rivals that seem to have soothed market concerns about the sector’s stability.

“So far the major banks that have reported have largely helped to settle market nerves,” said Khoon Goh, head of Asia research at ANZ in Singapore. “With those stresses easing away, markets are now back to focusing on the Fed.”

A slew of Federal Reserve speakers are in the frame over the rest of this week ahead of the pre-meeting blackout period that begins on the weekend.

The Fed’s “beige book” of economic conditions is published on Wednesday and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.

Markets are pricing an 86% chance the Fed raises rates by 25 basis points at the May meeting, and are winding back expectations of cuts later in the year – moves that have put the brakes on U.S. dollar selling.

Still, the inversion between three-month Treasury yields and 10-year yields , at more than 160 bps, is the deepest since 1981 when the Fed funds rate was climbing down from peak of 19% - suggesting markets expect rates to fall.

Ten-year yields were last at 3.5813%.

SURFACE CALM

The lack of big picture drivers in the Asia session left traders to look at earnings and ahead to economic data.

Dutch-listed chip equipment maker ASML beat first-quarter profit expectations, according to Refinitiv data. British and European inflation figures are due later in the day with currency markets delicately poised.

The winding back of rate cut expectations for the U.S. has given a floor to the dollar, but pressure on central banks in Britain and Europe to carry on hiking for some time has their currencies grinding higher.

Sterling hit a 10-month high of $1.2545 last week and bounced with strong wages data on Tuesday. It was last at $1.2420. The euro hit a one-year high above $1.10 last week and lurked at $1.0969 in Asia trade on Wednesday.

“Lower rate volatility and reduced expectations for Fed rate hikes should put the broad U.S. dollar in a weaker position,” HSBC analysts said in a currency outlook note.

“If anything, there could be a continued focus on short-end U.S. Treasury yields being lower than the Fed’s policy rate and how this was a precursor to it easing in the past.”

Elsewhere, Brent crude futures were steady at $84.52 a barrel, roughly where they have traded for a few weeks since OPEC+ announced surprise production cuts. Gold held above $2,000 an ounce and bitcoin above $30,000.

Citi strategist Matt King warned that the markets’ calm may be shortlived as central banks’ efforts to soothe worries about systemic bank risks start to wear off.

“Consensus holds that strong year-to-date risk performance stems from the genuine improvements in the economic outlook,” he said.

“But a better explanation is the injection of over $1 trillion in central bank liquidity. This held down real yields, propped up equity multiples, and tightened credit spreads in the face of falling earnings expectations. High-frequency liquidity indicators suggest this is already stalling.”