By: Asia Business Outlook Team | Wednesday, 08 March 2023
Asian stocks fell sharply on Wednesday, while the dollar rose after Federal Reserve Chair Jerome Powell's hawkish comments raised the prospect of the US central bank returning to large rate hikes to combat stubborn inflation.
Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress that the Fed will likely need to raise interest rates more than expected in response to recent strong data.
Powell's hawkish comments sent US stocks plummeting, and the risk-off mood persisted in Asian trade.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.45%, while Australia's S&P/ASX 200 index fell 0.70%. Japan's Nikkei rose 0.10 per cent.
China's stock market fell 0.33 percent, while Hong Kong's Hang Seng Index fell 1.4%.
Following a series of jumbo hikes last year, the Fed raised rates by 25 basis points in its last two meetings, but resilient economic data since the start of this year has raised concerns that the US central bank may return to larger rate hikes.
Powell confirmed those fears when he stated, "If the totality of the data indicates that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes."
Markets are now pricing in an almost 70 per cent chance of a 50 basis point rate hike at the Fed's March 21-22 policy meeting, according to CME's FedWatch tool, up from about a 30 per cent a day ago.
"Powell has essentially opened the door to 50 basis point hike," said Chris Weston, head of research at Pepperstone.
"He has given the Fed optionality, but one suspects he would be loath to do so as it is not a good look to change tactics when you’ve only just moved down to 25 basis points increments."
Short-term Treasury yields rose further on Wednesday, with the two-year US Treasury yield, which typically moves in tandem with interest rate expectations, rising 2.7 basis points to 5.038 percent, its highest level since mid-2007.
According to Refinitiv data, the gap between the yields on two-year and 10-year Treasury notes, which is seen as an indicator of economic expectations, was at -106 basis points, the lowest since August 1981. Such an inversion is seen as a reliable recession indicator.
"Given what we already knew, Powell's hawkish remarks shouldn't have been a surprise, but evidently the market was not prepared," said Rodrigo Catril, senior currency strategist at National Australia Bank.
"Recent data were already telling us that the U.S. economy started 2023 on a much stronger footing than most had anticipated with inflationary pressures also proving more persistence."
The focus will now shift to Friday's US payrolls data and next week's inflation figures, which will determine the Fed's next steps.
The dollar was at a three-month high in the currency market, with the euro up 0.01 percent to $1.0548.
The Japanese yen fell 0.15 percent to 137.33 per dollar, while the pound rose 0.06 percent to $1.1834.
US crude fell 0.04 percent to $77.55 per barrel, while Brent was up 0.06 percent on the day at $83.34.