Asian stocks fell Thursday after Federal Reserve Chairman Jerome Powell maintained his recent hawkish tone about the bank’s expected interest rate path, but the focus was on the Bank of England later in the day policy-making. In the futures market, Eurostox 50 futures fell 0.51%, German DAX futures fell 0.55% and FTSE futures fell 0.63%, suggesting that European stocks are likely to start with big losses.
The MSCI’s broadest index of non-Japanese Asia-Pacific stocks fell 0.24 percent to 521.81, its fourth consecutive day of declines, ending a three-week winning streak. The index fell about 2.7% this week, its lowest level since early March. The Fed last week left rates unchanged between 5% and 5.25%, but officials expect another 0.5 percentage point hikes will be needed by the end of the year to keep inflation under control.
Powell in his remarks to lawmakers in Washington said the outlook for two further 25-basis-point (bps) rate increases are “a pretty good guess” of where the central bank is heading if the economy continues in its current direction. Markets, though, remain unconvinced, pricing in a 72% probability of a 25 bps hike next month, but no further hikes after that, according to the CME FedWatch tool.
Kevin Cummins, chief economist at NatWest Markets, said Powell’s testimony didn’t shed any new light on the Fed’s thinking or the likely future path for monetary policy, adding that his tone was very similar to last week’s press conference and mostly leaned hawkish. “It’s clear that the FOMC wants the market to understand that a hike will be on the table for debate at the next meeting. The Fed’s data-dependent approach in this tightening cycle suggests upcoming data releases could shift expectations.”
Atlanta Federal Reserve President Raphael Bostic said on Wednesday the Fed should not raise rates further or it would risk “needlessly” sapping the strength of the U.S. economy. The comments confirm a growing debate within the central bank over when and whether it should raise rates further. `I would like to stop talking about the Fed for the next six months, but the Fed will continue to drive sentiment,” said Michael Dyer, investment director of multi-asset at M&G Investments.
Elsewhere in Asia, Australia’s S&P/ASX200 index (.AXJO) fell 1.57% and Japan’s Nikkei Stock Average (.N225) fell 0.12%. Stock markets in China and Hong Kong were closed for a public holiday, slowing trading. With interest rates expected to rise, investors’ eyes will be firmly on the Bank of England, but the only question is how big the hike will be after Wednesday’s better-than-expected inflation data.
A Reuters poll last week found economists agreed that the Bank of England would raise interest rates to 4.75%, the highest since 2008, from 4.5%, but inflation data pushed financial markets to choose whether or not the central bank would raise rates. It has a probability of close to 50%. Raise interest rates by 0.5 percentage points. National Australia Bank economist Taylor Nugent said inflation in the UK had peaked at 8.7% in May, adding: “Other central bank concerns are now easing more than expected. “It’s slow, but the UK is still accelerating.” The pound finally hit $1.2765, not far from last week’s 14-month high of $1.2849.
The euro rose 0.01 percent to $1.0988 after hitting a one-month high at $1.09925 in early trading. The Japanese yen rose 0.11% to 141.70 yen to the dollar. The dollar rose 0.05% against basket currencies to $102.07, close to the one-month low of $102 reached last week.
Apart from the central bank, the market will await a policy decision from the Turkish central bank on the back of broad expectations of a policy change and a significant rate hike. The Turkish lira has fallen to its lowest level since last month’s election, trading at 23.56 lira to the dollar in recent trading.
The Swiss National Bank and Norwegian Central Bank are also expected to raise rates by 25 basis points each. On the day, US crude fell 0.37% to $72.26 a barrel, while Brent crude fell 0.34% to $76.86. The gold spot fell 0.1% to $1,929.69 an ounce, just above its three-month low hit Wednesday.