Asian stocks got off to a shaky start on Thursday as the head of the Federal Reserve, Jerome Powell, maintained his recent hawkish tone. Investors are evaluating the potential rate policy route that the Fed may take in the future.
The most comprehensive index of Asia-Pacific equities compiled by MSCI that does not include Japan (.MIAPJ0000PUS) finished the day at 522.93. The index has lost more than 2% overall this week and is on track to end its three-week winning streak.
The S&P/ASX 200 index in Australia (.AXJO) went down by 1.17%, while the Nikkei index in Japan (.N225) went down by 0.25%. The stock exchanges in China and Hong Kong are both closed today due to holidays.
The Federal Reserve kept its benchmark interest rate unchanged between 5% and 5.25% last week; however, policymakers have forecast that rates would need to climb by another half percentage point by the end of the year in order to bring inflation under control.
According to the CME FedWatch tool, the markets, however, continue to be sceptical and are pricing in a rate rise of 25 basis points the next month but none beyond that.
If the economy continues to go the same way as it has, the Federal Reserve is likely to raise interest rates two more times by a total of 25 basis points, as Chairman Powell said in his address to legislators in Washington. Powell called this scenario “a pretty good guess” for the future of the Fed.
His comments, which had been highly anticipated by investors, did not in any way come as a surprise to them.
Powell’s testimony, according to Kevin Cummins, chief economist at NatWest Markets, did not provide any fresh insight on the Fed’s thinking or the probable future course for monetary policy. Cummins said that Powell’s tone was fairly similar to that of last week’s press conference and largely leaned hawkish. Powell’s hearing was held on March 20.
“It should come as no surprise that the FOMC intends for the market to be aware that a rate increase will be on the agenda for discussion at the next meeting. Because the Federal Reserve is basing its current tightening cycle on data, it is possible that forthcoming data releases may cause expectations to change.
Raphael Bostic, president of the Atlanta Federal Reserve, said on Wednesday that the Federal Reserve should refrain from raising interest rates any more or it runs the danger of “needlessly” weakening the state of the American economy.
The remarks provide insight into the ongoing discussion that is taking place inside the central bank over when and whether the central bank should increase interest rates further.
Investors will be focusing their attention on the Bank of England later in the day, as a rate increase is generally anticipated. The only question that remains is the magnitude of the increase, given that inflation data came in higher than anticipated on Wednesday.
Last week, Reuters conducted a survey in which economists were united in their prediction that the Bank of England (BoE) would increase interest rates to 4.75%, their highest level since 2008, from 4.5%. However, the inflation figures caused financial markets to price in a nearly 50% possibility that the BoE would opt for a greater move and raise rates by a half of a percentage point.
“Where other central banks’ concern is now slower-than-hoped easing, the UK is still seeing acceleration,” said Taylor Nugent, an economist at National Australia Bank, in reference to runaway UK inflation, which remained at 8.7% in May. Nugent was alluding to the fact that other central banks’ concerns are now related to slower-than-hoped easing.
“The burden of proof has been placed on the data showing more persistent inflation pressures in order to continue hiking bank rates, according to the BoE’s conditional guidance.” When combined with the statistics on salaries from the previous week, they have that in spades.
Last seen at $1.2769, up 0.01% on the day, the pound is hanging dangerously close to a one-year high of $1.2849, which was reached only last week.
The value of the euro increased by 0.06% to $1.0991 after earlier in the trading session reaching a one-month high of $1.09925. The value of one dollar in Japanese yen increased by 0.11%, reaching 141.70.
The markets will also be closely monitoring the central bank of Turkey’s policy decision. A policy shift and a significant rate hike are two outcomes that are commonly anticipated.
Since the election that took place a month ago, the value of the Turkish lira has plummeted to all-time lows and most recently bought 23.56 dollars.
Brent oil was priced at $77.06 per barrel, a decrease of 0.08% on the day, while U.S. crude dropped to $72.48 per barrel, a decrease of 0.07%.
