Asian Stocks Feel The Heat From Sudden U.S. Interest Rate Outlook

3d rendering of technical financial graph on stock exchange display panel

Asian stocks on Tuesday come off the back of their worst day since June hoping for recovery, but vulnerable to an expected interest rate hike in Australia, potentially critical comments from Fed Chair Jerome Powell and deepening U.S.-Sino tensions.

Another close in the red for Wall Street on Monday won’t boost the likelihood of a rebound much either, as U.S. markets lurch to price in a ‘higher for longer’ Fed this year.

The pick of the Asian economic data and events calendar will be the Reserve Bank of Australia’s rate decision and subsequent guidance from policymakers.

The RBA is expected to deliver a fourth consecutive quarter-point interest rate hike to 3.35%, after inflation unexpectedly rose last year to a 33-year high of 7.8%.

However, figures on Monday showed retail sales are falling for the first time in a year, a sign that higher rates are maybe starting to bite.

In Japan, meanwhile, speculation on the next Bank of Japan governor is intensifying. According to the Nikkei newspaper, Japan’s government has sounded out BOJ Deputy Governor Masayoshi Amamiya to succeed Haruhiko Kuroda.

Many analysts see him as a pragmatic policymaker who will prefer tip-toeing toward any exit from the BOJ’s ultra-loose monetary policy rather than make sudden changes to a stimulus program he helped create.

And the yen is on the slide. It fell 1% on Monday and is down 3% since Friday, its biggest two-day fall in three years.

Generally speaking, Asian markets are feeling the heat from the sudden U.S. interest rate outlook shift following January’s freakishly strong U.S. jobs report released on Friday.

The Fed’s implied ‘terminal’ rate in June is now well above 5.00%, the implied year-end rate is higher than current the fed funds range, markets are now pricing in only 20 basis points of easing this year and the two-year yield has spiked around 40 basis points.

This may be the tightening of financial conditions Fed Chair Powell and his colleagues are seeking. Or they may be irrational and unjustified market swings in response to one data point that will prompt a response from Powell when he speaks at the Economic Club of Washington on Tuesday.

The MSCI Asia ex-Japan index slumped 2.4% on Monday, its worst day since June last year, Chinese stocks had their worst day this year (blame Beijing-Washington tensions too) and Hong Kong tech stocks fell 3.6%.

Here are three key developments that could provide more direction to markets on Tuesday; Fed Chair Powell speaks (Economic Club of Washington), Australia interest rate decision and China FX reserves (January).

Shanghai, Hong Kong and Seoul retreated. Tokyo gained. Oil prices edged higher.

Wall Street wilted Friday after official data showed U.S. employers hired twice as many people in January as the previous month. That was good news for workers but dampened hopes the Federal Reserve might decide no more rate increases are needed to slow economic activity.

The numbers “look set to inevitably burst the bubble on Fed pivot bets” because they “suggest a re-acceleration in wage pressures,” said Tan Boon Heng of Mizuho Bank in a report.

The Shanghai Composite Index fell 0.9% to 3,233.97 while the Nikkei 225 in Tokyo advanced 1.1% to 27,801.97. The Hang Seng in Hong Kong sank 2.3% to 21,163.79.

The Kospi in Seoul declined 0.9% to 2,459.07 and Sydney’s S&P-ASX 200 retreated 0.2% to 7,542.00.

Singapore gained while Jakarta retreated. New Zealand financial markets were closed for a holiday.

On Wall Street, the benchmark S&P 500 fell 1% on Friday to 4,136.48 after the government reported the economy added 517,000 jobs in January. That was double December’s 260,000 and more than double the 185,000 expected by economists.

Average hourly wages were 4.4% higher in January than a year earlier. That was lower than December’s 4.8% raise but above expectations. Central bankers worry wage growth can push up consumer prices.

The data dampened investor hopes that lower inflation might persuade the Fed and other central banks to ease off plans for more rate increases. They worry central bankers might be willing to tip the global economy into recession to stop inflation that is near multi-decade highs.

Some traders expect the Fed to cut rates late this year, despite warnings by officials that more increases are planned. Officials of the European Central Bank have issued similar warnings.

The Dow Jones Industrial Average dropped 0.4%to 33,926.01. The Nasdaq composite sank 1.6% to 12,006.96.

Also Friday, a separate report showed U.S. service industries returned to growth in January. It was a stronger reading than expected but suggested pricing pressures may be easing, AP cited.

In energy markets, U.S. benchmark crude gained 17 cents to $73.56 per barrel in electronic trading on the New York Mercantile Exchange. The contract tumbled $2.49 on Friday to $73.39. Brent crude, the price basis for international oil trading, advanced 25 cents to $80.19 per barrel in London. It lost $2.23 the previous session to $79.94.

The dollar rose to 131.88 yen from Friday’s 131.07 yen. The euro fell to $1.0796 from $1.0805.

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