Asia’s stock markets were steady but fragile on Thursday, a day after their biggest drawdown in three months as investors weighed the risk of the Federal Reserve announcing a 100-basis-point interest rate hike next week to tackle sticky inflation.
The Japanese yen loitered just above recent lows, riding a boost from the strongest hints yet of possible market intervention by Japanese authorities. The New Zealand dollar jumped a bit on better-than-expected growth data.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4% and Japan’s Nikkei rose 0.3%.
“Equity markets are presently in no-man’s land,” said Sean Darby, global equity strategist at Jefferies in Hong Kong.
“Better macro news to support earnings is discounted as the need for further tightening to quash growth — while CPI [consumer price index] prints are not declining fast enough,” he said.
“The best metaphor is that the Fed is not only driving the economy using a rear-view mirror but is now being forced to press the ‘rate rise’ accelerator just as bond markets are discounting an overtightening.”
Fed funds futures, which were dumped along with stocks after Tuesday’s stubbornly hot US inflation reading, imply a 37% chance of a 100-basis-point rate hike next week and have the benchmark US interest rate about 4.3% by February.
Treasuries were calm in Tokyo trade on Thursday, but the US yield curve is deeply inverted — often a signal of a looming recession — as investors believe that rate hikes through 2022 and 2023 will take a bite out of future growth.
Two-year yields, which track near-term rate expectations, were steady at 3.7860%, up 22 basis points this week for a seventh straight weekly gain. The benchmark 10-year yield was at 3.4062%.
“[There are] two opposing forces for the 10-year note — the upward pressure from Fed hikes and downward pressure from a potential economic downturn in the future,” said NatWest Markets’ US rates strategist Jan Nevruzi.
“We are more firmly in the camp that more hikes today increase the odds for a deeper recession.”
Line in the sand
One bright patch on Thursday was China’s beleaguered property sector, with news reports on forthcoming government support lifting a Hong Kong index of mainland developers 6.5%. The broader Hang Seng rose 0.8%.
In currency markets, the US inflation shock and expectation of rate hikes in response has sent the greenback up to re-test recent multi-decade highs. Thursday moves were modest with the euro steady at $0.9978 and the Aussie taking a small lift to $0.6754 after some mixed employment data.
The yen, pounded about 20% lower against the dollar in 2022, bounced off its lows a day ago when the Bank of Japan checked dollar/yen rates with banks around the ¥145/$ level — a possible prelude to yen buying. It was last at 143.05/$.
“I certainly don’t want to be the one to stand here and suggest that this is the line in the sand,” Shafali Sachdev, head of foreign exchange, fixed income and commodities for Asia at BNP Paribas Wealth Management in Singapore.
“But what’s clear is that the market is wary of the level, and has tried to test the level a few times, which seems to suggest that if it breaks, it may overshoot quite rapidly.”
Thursday data showed Japan posted a record trade deficit in August, aggravated by the yen’s slide, but also yet another weight on the currency.
Later in the day European trade data is due and Chinese President Xi Jinping meets Russia’s Vladimir Putin in Uzbekistan.
Brent crude futures held at $94.04 a barrel. Spot gold, which has slipped as the dollar and US yields have gone up, sat at $1,696/oz.