22-6-2023 (SINGAPORE) Asian shares made a cautious start on Thursday as investors assessed the future rate policy path of the Federal Reserve following Federal Reserve Chair Jerome Powell’s adherence to his recent hawkish stance.
MSCI’s broadest index of Asia-Pacific shares outside Japan edged marginally lower to 522.93. The index is down over 2% for the week, putting an end to its three-week winning streak.
Australia’s S&P/ASX 200 index lost 1.17%, while Japan’s Nikkei eased 0.25%. Chinese and Hong Kong stock markets remained closed for a holiday.
Last week, the Fed maintained its benchmark interest rate at a level between 5% and 5.25%, but officials projected that rates would need to rise another half percentage point by the end of the year to combat inflation.
However, markets remain unconvinced and have priced in a 25 basis point hike next month, according to the CME FedWatch tool, with no further hikes anticipated thereafter.
During his testimony to lawmakers in Washington, Powell stated that the outlook for two additional 25 basis point rate increases is “a pretty good guess” if the economy continues its current trajectory.
While investors eagerly awaited Powell’s remarks, they offered no real surprises.
Kevin Cummins, chief economist at NatWest Markets, noted that Powell’s testimony did not provide new insights into the Fed’s thinking or the likely future path of monetary policy. Cummins added that Powell’s tone was very similar to last week’s press conference, leaning mostly hawkish.
“It’s clear that the FOMC wants the market to understand that a hike will be on the table for debate at the next meeting. The Fed’s data-dependent approach in this tightening cycle suggests upcoming data releases could shift expectations.”
On Wednesday, Atlanta Federal Reserve President Raphael Bostic stated that the Fed should refrain from further rate hikes, as doing so would risk “needlessly” weakening the U.S. economy.
These comments highlight the ongoing debate within the central bank regarding when and if further rate hikes should occur.
Investor focus will turn to the Bank of England (BoE) later in the day, with a rate hike widely expected. The only question is the magnitude of the increase following Wednesday’s higher-than-expected inflation data.
In a Reuters poll conducted last week, economists were unanimous in their prediction that the BoE would raise rates to 4.75%, the highest level since 2008, from 4.5%. However, the inflation data prompted financial markets to price in a nearly 50% chance of a larger move, with a half-percentage-point rate hike.
Taylor Nugent, an economist at National Australia Bank, highlighted the UK’s persistent inflation, which stood at 8.7% in May, stating, “Where other central banks’ concern is now slower-than-hoped easing, the UK is still seeing acceleration.”
Sterling was last trading at $1.2769, up 0.01% for the day, hovering close to a one-year high of $1.2849 reached last week.
The euro rose 0.06% to $1.0991, having touched a one-month high of $1.09925 earlier in the session. The Japanese yen strengthened 0.11% to 141.70 per dollar.
Market participants will also await the policy decision from Turkey’s central bank, with a policy shift and a significant rate increase widely anticipated.
Since last month’s election, the Turkish lira has plummeted to record lows and was last trading at 23.56 per dollar.
In the oil markets, U.S. crude fell 0.07% to $72.48 per barrel, while Brent was down 0.08% at $77.06.
