Singapore: Asian shares were on track for their worst day in a month on Wednesday after hawkish comments from Federal Reserve Chair Jerome Powell raised the possibility of the US central bank returning to large rate hikes to tackle sticky inflation.
The Fed will likely need to raise interest rates more than previously expected in response to recent strong data, Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress.
The comments from Powell sent stocks sharply lower, weighed on gold, while pushing the dollar to its three month high.
MSCI’s broadest index of Asia-Pacific shares outside Japan was 1.69 per cent lower at 514.71, with the downbeat mood set to spill over to Europe as futures indicate a lower open. Eurostoxx 50 futures down 0.19 per cent, German DAX futures down 0.28 per cent and FTSE futures down 0.23 per cent. After a series of jumbo hikes last year, the Fed raised rates by 50 basis points in December and by just 25 basis points at its last meeting in February.
However, resilient economic data since start of this year had stoked fears the US central bank might return to larger rate rises, which Powell acknowledged.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.
Markets are now pricing in an almost 70 per cent chance of a 50 basis point rate hike at the Fed’s March 21-22 policy meeting, according to CME’s FedWatch tool, up from about a 30 per cent a day ago.
Asian stocks tumble
“Powell has essentially opened the door to 50 basis point hike,” said Chris Weston, head of research at Pepperstone.
“He has given the Fed optionality, but one suspects he would be loath to do so as it is not a good look to change tactics when you’ve only just moved down to 25 basis points increments.” In Asia, Powell comments cast a shadow with most markets nursing heavy losses. Australia’s S&P/ASX 200 index fell nearly 1 per cent, while China shares slipped 0.59 per cent. Hong Kong’s Hang Seng Index fell 2.65 per cent, on course for its worst day since late January.
Japan’s Nikkei was the sole stock index in Asia with gains, up nearly 0.5 per cent, as a weakening yen buoyed exporters.
Shorter-term Treasury yields continued its ascent on Wednesday, with the two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 4.9 basis points at 5.060 per cent, having touched fresh near 16 year high of 5.078 per cent earlier in the session.
US payrolls data
A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -107.3 basis points, its deepest since August 1981, according to Refinitiv data. Such an inversion is seen as a reliable recession indicator.
“Given what we already knew, Powell’s hawkish remarks shouldn’t have been a surprise, but evidently the market was not prepared,” said Rodrigo Catril, senior currency strategist at National Australia Bank, adding recent data was signalling the US economy started 2023 on a much stronger footing than most had anticipated.
Citi strategists said even as-expected payrolls and inflation data could keep the chance of a 50 basis point hike high. “Not following through on a 50 bps increase could then entail an unhelpfully large easing of financial conditions.” In the currency market, the dollar continued its charge, touching three month high. The dollar index, which measures the US currency against six major rivals, was last at 105.77, up 0.114 per cent, after surging 1.3 per cent on Tuesday.
The dollar rose as high as 0.54 per cent against the yen to touch 137.90, its highest since December 15, before easing to trade at 137.67, ahead of the Bank of Japan meeting on Thursday and Friday, when the central bank is expected to stick to its ultra loose monetary policy The euro slipped 0.11 per cent to $1.0536, pinned near its two-month low. Sterling was last trading at $1.1824, down 0.02 per cent on the day, having touched more than three month low of $1.1812 earlier in the session.