Asian share markets slid on Thursday after the U.S. 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 3.75-4.0%, 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 or 75 basis points in December, and nudged up the top for rates to 5.0-5.25% 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%, while Nasdaq futures fell 0.2%.
MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.9%, with South Korea down 1.5%.
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% 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 U.S. 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 center 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%.
“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 $1.1374 after retreating from a top of $1.1564 overnight.
The U.S. 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 $0.9810 , having toppled from a high of $0.9976 overnight, while the dollar climbed to 147.87 yen from a trough of 145.68.
The bounce in the dollar and yields was a drag for gold, which was stuck at $1,633 an ounce after being as high as $1,669 at one stage overnight.
Oil prices also disliked the dollar rally with Brent down 88 cents at $95.28 a barrel, while U.S. crude fell $1.02 to $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.
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