Asia shares slip, Fed flags higher rates for longer
Passersby are silhouetted as they walk past in front of an electric stock quotation board outside a brokerage in Tokyo, Japan on Oct 18, 2022. (File photo: Reuters/Issei Kato)
SYDNEY: Asian share markets slid on Thursday (Nov 3) after the US Federal Reserve laid the groundwork for a protracted tightening campaign that torpedoed market hopes for a pause, sank bonds and lifted the dollar.
Investors were initially cheered that the Fed opened the door to a slowdown in the pace of hikes after raising interest rates 75 basis points to 3.75 per cent to 4.0 per cent, by noting that policy acted with a lag.
But Chair Jerome Powell soured the mood by saying it was "very premature" to think about pausing and that the peak for rates would likely be higher than previously expected.
"The Fed is now more comfortable with taking smaller rate increases for a longer period than delivering larger increases now," said Brian Daingerfield, an analyst at NatWest Markets.
"The tightening cycle is officially now a marathon, not a sprint."
Futures were now split on whether the Fed would move by 50 basis points or 75 basis points in December, and nudged up the top for rates to 5.0 per cent to 5.25 per cent likely by May next year. They also imply little chance of a rate cut until December 2023.
"Higher for longer" was not what the equity markets wanted to hear and Wall Street fell sharply after Powell's comments. Early Thursday, S&P 500 futures were off another 0.3 per cent, while Nasdaq futures fell 0.2 per cent.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.9 per cent, with South Korea down 1.5 per cent.
Japan's Nikkei was closed for a holiday, but futures were trading around 350 points below Wednesday's cash close.
Two-year Treasury yields popped up to 4.63 per cent as the curve bear flattened, with the spread to 10-year notes near its most inverted since the turn of the century.
Attention now turns to the US ISM survey of services later Thursday and Friday's payrolls report where any upside surprise will likely reinforce the Fed's hawkish outlook.
BoE TAKES THE STAGE
Also taking centre stage will be the Bank of England where the market is fully priced for a rate hike of 75 basis points to its highest since late 2008 at 3.0 prer cent.
"There will be interest in the BoE's new CPI and GDP forecasts, with the latter likely to show a deeper and more protracted recession in 2023 and 2024," said Ray Attrill head of FX strategy at NAB.
A gloomy outlook could put more pressure on the pound, which was pinned at US$1.1374 after retreating from a top of US$1.1564 overnight.
The US dollar was broadly bid on Powell's hawkish take, leaving the dollar index at 112.190 after an overnight bounce from a 110.400 low.
The euro was flat at US$0.9810, having toppled from a high of US$0.9976 overnight, while the dollar climbed to ¥147.87 from a trough of ¥145.68.
The bounce in the dollar and yields was a drag for gold, which was stuck at US$1,633 an ounce after being as high as US$1,669 at one stage overnight.
Oil prices also disliked the dollar rally with Brent down 88 cents at US$95.28 a barrel, while US crude fell US$1.02 to US$88.98.
In good news for bread lovers, wheat futures plummeted overnight after Russia said it would resume its participation in a deal to export grain from war-torn Ukraine.
