Asian investors step up selling
as rate hikes loom

HONG KONG (AFP): Investors further unloaded equities in Asia on Thursday as they girded themselves for more interest rate hikes aimed at quelling runaway inflation, with some analysts warning that markets could retest the lows touched in June.

Data showing prices rose at a record clip in the eurozone in August reinforced fears that central banks have a long road to run before they win their battle, which has fanned warnings of a recession in the world’s leading economies.

Another drop on Wall Street came as Treasury yields — a key gauge of future interest rates — rose further as a broadly healthy report on US private jobs showed there was still plenty of wiggle room for the Fed to continue tightening monetary policy.

Meanwhile, another top Fed official signalled the bank was determined to keep lifting borrowing costs, mirroring comments by head Jerome Powell last week that there would be no let-up in the fight against inflation.

“My current view is that it will be necessary to move the Fed funds rate up to somewhat above four percent by early next year and hold it there,” said Cleveland Fed President Loretta Mester in remarks prepared ahead of an event for the Dayton Area Chamber of Commerce.

“I do not anticipate the Fed cutting the Fed funds rate target next year.”
Interest rates are currently at 2.25-2.5 percent, and there is a growing expectation they will be hiked by a bumper 75 basis points for a third successive meeting later this month.

A government jobs report Friday will be closely watched by traders hoping for an idea about the next move by the bank, which has said it will make its decision based on data.

In a further warning that policymakers had a win-at-all-costs mentality, Mester later told the audience: “Even if the economy were to go into a recession, we have to get inflation down.”

The hawkish remarks out of the Fed have dealt a hefty blow to a rally in markets from their June lows.

And some have warned that more pain could be on the way, with Frances Stacy, of Optimal Capital Advisors, telling Bloomberg Radio: “I don’t think we’ve seen the bottom for this year.”

CMC markets analyst Michael Hewson added: “When you have the likes of a typical Fed dove like Minneapolis Fed President Neel Kashkari talk about the unlikely prospect of rate cuts in 2023, it’s hard to envisage a scenario of anything other than a 75-basis-point rate hike later this month, as the Fed continues to insist that their priority is to keep going on rates until the job is done.”

The downbeat mood in New York and Europe, which is also being buffeted by a major energy crisis, spread to Asia.

Tokyo, Hong Kong, Sydney, Seoul, Mumbai, Bangkok and Taipei were all deep in the red, though Singapore, Wellington, Manila and Jakarta eked out small gains.

Shanghai gave up an early advance following news that the Chinese city of Chengdu would effectively lock down around 16 million people in a bid to contain a Covid-19 outbreak, likely dealing another blow to an already stuttering economy.

London, Paris and Frankfurt fell further in early trade.

The prospect of more US rate hikes continued to press the dollar higher against all other currencies, with the psychological 140 yen mark well within sight for the first time since 1998.

And analysts are speculating that a breach of that barrier could see the Bank of Japan intervene, though they also warned it was unlikely to make much difference owing to Tokyo’s refusal to tighten its own monetary policy despite rising prices.

“There will likely be some sort of verbal intervention as 140 approaches,” said David Lu, of NBC Financial Markets Asia.

“But an actual intervention is likely to be ineffective at this point where the dollar is rising broadly on US monetary policy prospects while there is no support for the yen from the Bank of Japan.”

The greenback was also at its strongest level against the pound since the height of the pandemic in 2020, with sterling buying less than $1.16 in afternoon Asian trade.