Asian stocks followed Wall Street’s lead on Thursday, falling as investors perceived the Fed’s recent policy pronouncements as indicating higher-for-longer interest rates.
MSCI’s broadest Asia-Pacific share index outside Japan (.MIAPJ0000PUS) fell 0.4% by early afternoon Hong Kong time. Japanese Nikkei fell 0.6%. Chinese blue-chip (.CSI300) fell 0.6%, while Hong Kong’s benchmark fell 1.3%.
Two-year U.S. Treasury note yields reached a 17-year high of 5.1970% on Thursday morning and stayed around 5.18% by afternoon.
U.S. 10-year Treasury yields reached 4.4310%, a 16-year high, while Japan’s 10-year government bond yield reached a decade high.
Given the Fed’s hawkish stance, “We expect bond yields to see further upside in the very near term,” said J.P. Morgan Asset Management APAC chief market analyst Tai Hui.
He said, “However, high-interest rates will eventually cool the economy, leading to falling yields.” Still, they remain positive on long-tenor government bonds, investment-grade corporate debt, growth, and tech equities.
Ben Luk, senior multi-asset strategist at State Street Global Markets, said the Fed’s latest meeting was not hawkish but had two surprises.
Luk said that 2024 forecasts were slightly higher than projected, and Fed remarks suggested macroeconomic growth would continue even with rates higher for longer.
On Wednesday, the U.S. central bank kept interest rates and predicted a year-end increase, saying monetary policy will be tighter than expected through 2024.
By year-end, the median federal funds rate expectation is 5.1%, up from 4.6% in June.
Even if inflation slows in 2023 and beyond, the Fed expects only modest initial rate cuts.
U.S. policymakers’ median rate estimates for the next two years were revised upward, causing the dollar to bounce, Treasury rates to reach multi-year highs, the yield curve to flatten, and stocks to fall.
On Thursday, the dollar index reached 105.59, its highest level since March 9, pushing the yen near its worst since November.
Sterling fell to multi-month lows after a disappointing inflation report on Wednesday, raising worries about whether the Bank of England will maintain rates on Thursday like the U.S.
In early afternoon Asia, major stock futures fluctuated. S&P 500 e-minis fell 0.3%. Euro Stoxx 50, DAX, and FTSE futures lost 1%.
Asian markets will also be influenced by Indonesia, the Philippines, and Taiwan’s monetary policy decisions on Thursday and the Bank of England’s balanced call.
Oil prices dipped in Asian trade on Thursday after the biggest monthly drop the day before. U.S. crude fell 0.72% to $89.01. Brent sank to $92.87/barrel. Spot gold fell to $1,927.96 an ounce.
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