Hong Kong – Asian markets rose Thursday as traders cheered a sharp Federal Reserve interest rate hike that signalled it is intent on driving inflation down from four-decade highs, while its boss Jerome Powell said such big moves would not be commonplace.
Regional traders tracked a surge on Wall Street after the central bank move, with hopes that the surge in prices can be brought under control, though analysts warned uncertainty continued to rule owing to the perfect storm of crises including the Ukraine war and China’s slowdown.
The 0.75 percentage point increase — the biggest in nearly 28 years — had been widely expected by investors after data Friday showed inflation at its highest since 1981, driven mostly by energy and food costs.
Powell said it was “essential” to lower inflation, and policymakers “have both the tools we need and the resolve it will take to restore price stability on behalf of American families”.
He stressed that the goal is to achieve that without derailing the US economy but acknowledged there was always a risk of going too far.
In his post-meeting news conference, he told reporters the move was “an unusually large one” but he did not expect “moves of this size to be common”.
However, “from the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting”.
While the lift was bigger than the 50 basis points flagged before Friday’s figures, it was welcomed as a sign the Fed was on the case and helped push down Treasury yields — a key guide to future rate expectations.
The 75 basis points hike “is a solid showing that will, all else being equal, serve to improve Fed credibility and leave monetary policy slightly less behind the inflationary curve”, said BMO Capital Markets strategists Benjamin Jeffery and Ian Lyngen.
“The response in risk assets will ultimately define the extent to which the Fed will be able to normalise monetary policy.”
After the strong performance on New York’s three main indexes, Asia largely followed suit on hopes that a sharp burst of rate increases early will allow the bank to begin cutting sooner.
Tokyo, Sydney, Shanghai, Seoul, Singapore, Wellington, Taipei, Manila and Jakarta all rallied.
However, Hong Kong dipped after a big gain Wednesday, while investors there were also contemplating a sharp rate hike in the city owing to its monetary policy link to the United States.
“Powell must be pretty pleased with his press conference and the market reaction as he delivered what I would interpret as a ‘dovish’ 75 basis point hike. Equities are up, rate expectations are slightly down and the dollar is a bit softer,” said SPI Asset Management’s Stephen Innes.
“Still, the Fed now needs the data to play along for the ride and inflation to not surprise on the upside again. If it does, 75 basis points for July and September will be quickly repriced.”
But he added that “the much taller order for stocks to return to any semblance of bullish form would likely require an improbable upbeat mix of a seamless China growth recovery, a convincing deceleration of US inflation, and much softer oil prices”.
Other analysts were also wary about the outlook, with some concerned that the Fed measures could tip the world’s top economy into recession.
“The volatility in bond markets is definitely not over,” Jasmin Argyrou, of Credit Suisse Private Bank, told Bloomberg Television. “The likelihood is that policy rates in the US may need to go to a more restrictive stance than even the market is pricing in.”
Oil prices edged up a day after taking a hit from demand worries caused by new Covid containment measures in China and data showing a surge in US production.
The black gold was helped by a warning from the International Energy Agency that global supplies — hammered by the Ukraine conflict — will struggle to meet demand next year.
The euro remained under pressure, having enjoyed a selling respite Wednesday after the European Central Bank said at an emergency meeting that it would act to ease stress on sovereign debt markets and design a new instrument to ward off a fresh crisis in the eurozone.
Borrowing costs in some eurozone countries are rising faster than in others as the ECB tightens its monetary policy, but officials said they would prevent such “fragmentation” that occurred during the region’s debt crisis a decade ago.
– Key figures at around 0250 GMT –
Tokyo – Nikkei 225: UP 1.4 percent at 26,694.05 (break)
Hong Kong – Hang Seng Index: DOWN 0.1 percent at 21,291.07
Shanghai – Composite: UP 0.2 percent at 3,311.30
Dollar/yen: UP at 134.41 yen from 133.69 yen late Wednesday
Euro/dollar: DOWN at $1.0438 from $1.0457
Pound/dollar: DOWN at $1.2153 from $1.2181
Euro/pound: UP at 85.88 pence from 85.80 pence
West Texas Intermediate: UP 1.0 percent at $116.47 per barrel
Brent North Sea crude: UP 0.8 percent at $119.47 per barrel
New York – Dow: UP 1.0 percent at 30,668.53 (close)
London – FTSE 100: UP 1.2 percent at 7,273.41 (close)