Asian markets mixed as rate hike rally fades

PERSON WITH INTEREST A trader watches television screens showing Federal Reserve Chairman Jerome Powell announcing a big interest rate increase on the floor of the New York Stock Exchange in New York City on Wednesday, June 15, 2022 (June 16 in Manila). AFP PHOTO

HONG KONG: Asian markets were mixed on Thursday as an early rally fueled by a “dovish” Federal Reserve (Fed) interest rate hike gave way to the prospect of an extended period of tight monetary policy.

Traders tracked a strong performance on Wall Street at the open as the US central bank move signaled it is bent on fighting runaway prices, while Fed Chairman Jerome Powell said such big moves would not be commonplace.

The 0.75-percentage-point increase — the biggest since 1994 — had been expected after data last Friday showed inflation in America at its highest since 1981, as the supply chain snarls caused by the war in Ukraine sent energy and food costs soaring.

Powell said it was “essential” to lower inflation, and policymakers “have both the tools we need, and the resolve it will take to restore price stability on behalf of American families.”

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He stressed that the goal was to achieve that without derailing the US economy, but acknowledged there was always a risk of going too far.

In his post-meeting news conference, the Fed chief told reporters the move was “an unusually large one,” but he did not expect “moves of this size to be common.”

But “from the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting,” he said.

While the lift was bigger than the 50 basis points flagged before Friday’s figures, it was welcomed as a sign the Fed was on the case and helped push down Treasury yields, a key guide to future rate expectations.

The 75-basis-point hike “is a solid showing that will, all else being equal, serve to improve Fed credibility and leave monetary policy slightly less behind the inflationary curve,” BMO Capital Markets strategists Benjamin Jeffery and Ian Lyngen said.

“The response in risk assets will ultimately define the extent to which the Fed will be able to normalize monetary policy,” they added.

However, after chasing higher in the first few hours of the day, Asia lost momentum in the afternoon.

Tokyo, Singapore, Seoul, Wellington, Manila and Jakarta held up, but Shanghai, Sydney, Taipei, Mumbai and Bangkok also closed in the red.

Hong Kong led the losses after a big gain on Wednesday and as investors there contemplated a sharp rate hike in the city, owing to its monetary policy link to the United States.

‘Pretty pleased’

“Powell must be pretty pleased with his press conference and the market reaction as he delivered what I would interpret as a ‘dovish’ 75-basis-point hike. Equities are up, rate expectations are slightly down and the dollar is a bit softer,” SPI Asset Management’s Stephen Innes said.

But “the Fed now needs the data to play along for the ride and inflation to not surprise on the upside again,” he added. “If it does, 75 basis points for July and September will be quickly repriced.”

“The much taller order for stocks to return to any semblance of bullish form would likely require an improbable upbeat mix of a seamless China growth recovery, a convincing deceleration of US inflation, and much softer oil prices,” he said.

Other analysts were also wary about the outlook, with some concerned that the Fed measures could tip the world’s top economy into a recession.

“The volatility in bond markets is definitely not over,” Jasmin Argyrou of Credit Suisse Private Bank told Bloomberg Television. “The likelihood is that policy rates in the US may need to go to a more restrictive stance than even the market is pricing in.”

European markets dropped at the open, with London traders awaiting a Bank of England policy meeting that is expected to see it raise rates for a fifth straight time.

On currency markets, the dollar resumed its upward march across the board as the gap between the monetary policies of the Fed and other central banks widened.

The euro was particularly under pressure, having enjoyed a selling respite on Wednesday after the European Central Bank (ECB) said at an emergency meeting it would act to ease stress on sovereign debt markets and design a new instrument to ward off a fresh crisis in the eurozone.

Borrowing costs in some eurozone countries are rising faster than in others as the ECB tightens its monetary policy, but officials said they would prevent such “fragmentation” that occurred during the region’s debt crisis a decade ago.

Oil prices ticked up a day after taking a hit from demand worries caused by new Covid-19 containment measures in China and data showing a surge in US production.