Asian shares plunge as Fed chair’s hawkish remarks signal large rate hikes

Singapore — Asian shares fell sharply on Wednesday, while the dollar advanced after hawkish comments from Federal Reserve chair Jerome Powell raised the possibility of the US central bank returning to large rate hikes to tackle sticky inflation.

It is anticipated the Fed will raise interest rates more than previously expected in response to recent strong data, Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress.

The hawkish comments from Powell sent US stocks sharply lower, with the risk-off mood continuing in Asian trade.

MSCI’s broadest index of Asia-Pacific shares outside Japan was 1.72% lower and was on track for its biggest one-day percentage drop in a month. Australia’s S&P/ASX 200 index fell nearly 1%, while Japan’s Nikkei was the sole stock index in Asia with gains, up 0.3%.

China shares slipped 0.42%, while Hong Kong’s Hang Seng index fell 2.5%, set for its worst day since late January.

The downbeat mood is set to spill over to Europe, with futures indicating a lower open. Euro Stoxx 50 futures were down 0.19%, German DAX futures fell 0.27% and FTSE futures were down 0.27%.

After a series of jumbo hikes last year, the Fed raised rates by 25 basis points (bps) in its last two meetings.

However, resilient economic data since start of this year had stoked fears the US central bank might return to larger rate rises, which Powell acknowledged.

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

Markets are now pricing in an almost 70% chance of a 50 bps hike at the Fed’s March 21-22 policy meeting, according to CME’s FedWatch tool, up from about a 30% a day ago.

High chance for a 50 bps hike

“Powell has essentially opened the door to [a] 50 bps 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 bps increments.”

Shorter-term treasury yields continued its ascent on Wednesday, with the two-year US treasury yield, which typically moves in step with interest rate expectations, up 6.7 bps at 5.078%, its highest since mid-2007.

A closely watched part of the US treasury yield curve measuring the gap between yields on two- and 10-year treasury notes, seen as an indicator of economic expectations, was at -107.6 bps, its deepest since August 1981, according to Refinitiv data. 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 (NAB), adding recent data was signalling the US economy started 2023 on a much stronger footing than most had anticipated.

The spotlight will now be on Friday’s US payrolls data and next week’s inflation figures that will dictate further moves from the Fed.