Asian markets drop as traders contemplate higher-for-longer rates

HONG KONG (AFP): Asian markets sank Wednesday following hefty losses on Wall Street as still-strong economic data fanned expectations that US interest rates will go higher and stay there longer than expected.

Traders are now awaiting the release of minutes from the Federal Reserve’s latest policy meeting hoping for an idea about officials’ views on how much and how far to lift borrowing costs.

All three main indexes in New York plunged at least two percent Tuesday, with forecast-beating purchasing managers index data showing the US economy remained in rude health despite almost a year of rate hikes and elevated inflation.

The readings followed a massive surge in new jobs in January and a slower-than-hoped drop in inflation, piling pressure on the Fed to continue tightening policy, which many fear could spark a recession.

Adding to the dark mood were downbeat 2023 projections from retail titans Walmart and Home Depot, who noted the impact of inflation and higher interest rates on consumer health.

They also essentially put to bed any talk of the Fed pausing its rate hikes and even cutting rates by the end of the year.

“A tight labour market and resilient consumer demand could goad the Federal Reserve to maintain its rate hiking campaign into the summertime,” said Jeffrey Roach, chief economist for LPL Financial.

“Investors should expect volatility until markets and central bankers come to agreement on the expected path for interest rates.”

In early Asian trade, Tokyo, Seoul, Taipei and Manila were down more than one percent, while there were also losses in Hong Kong, Shanghai, Sydney, Singapore, Wellington and Jakarta.

The Fed minutes, which are due to be released later Wednesday, are a key focal point for traders.

They come after a number of policymakers have lined up to warn of more tightening to come as they try to bring inflation back down to their two percent target from the current levels above six percent.

Two last week said they could see a case for a 50 basis-point lift at next month’s meeting, while markets are now betting on rates topping out at 5.3 percent, up from the previous forecast for 4.9 percent three weeks ago.

Matt Simpson, of City Index, said: “It has taken over two weeks, a plethora more hawkish comments and strong data for markets to slowly wake up to the fact that a higher terminal rate is the more likely path for the Fed, and for us to forget about cuts this year.”

Both main oil contracts extended recent losses as concerns over rates and a possible recession overshadowed demand optimism linked to China’s reopening from zero-Covid.

However, Warren Patterson, of ING Groep, said prices would likely rise in the second half of the year as the crude market tightens.