The Nub
Losses loom for Asia’s stock market on Monday as investors absorb Federal Reserve Chair Jerome Powell’s stern message that interest rates are going higher for longer in a painful fight against inflation. Futures shed almost 2% for Japan and 1.5% for Australia after a 3.4% plunge in the S&P 500 index. The slide was sparked by Powell’s rebuttal of the notion that the trajectory of monetary tightening could soon be tempered.
Why Does it Matter
Friday’s US slump further shriveled a global bounce in shares from June bear-market lows that was predicated partly on bets of a Fed shift to rate cuts next year as growth slows. Powell spelled out the need for sustained restrictive policy, comments that lifted the US two-year Treasury yield toward 2022’s high and sent investors scurrying to the dollar as a shelter from volatility. The greenback’s strength could be an impediment for Asia’s markets on Monday. Investor angst was evident over the weekend as Bitcoin flirted with a sustained break below $20,000, a sign of fizzling risk appetite. Powell was “really hawkish” at Jackson Hole, said Manish Bhargava, a Straits Investment Holdings fund manager in Singapore. There’ll be a “lot of red on Monday” in a fizzling summer rally as money exits emerging markets, he said.
What Next
“USD/JPY is the most obvious way to play for an increasingly determined Fed, with 140 likely to give way before the September FOMC meeting,” said Sean Callow, Westpac’s senior currency strategist. But the prevailing message from the symposium was that borrowing costs are going up from the US to Europe to Asia. Officials are combating some of the highest inflation in a generation, stoked by damage to supply chains for energy and components due to Russia’s war in Ukraine and Covid curbs in China. Investors now see the Fed’s policy rate peaking in March at around 3.80% and pared bets on a decline in 2023. The US yield curve between the five and 30-year maturities inverted for the second time this month, while the gap between the higher two-year yield and the 10-year rate widened.
