Markets in Asia fell on Thursday after a sell-off in New York sparked by Federal Reserve minutes suggesting officials intended to raise interest rates further to combat decades-high inflation.
While policymakers said they would have to start slowing their pace of tightening at some point, they said they would keep borrowing costs high “for some time,” although acknowledging there was a risk of going too far and damaging the economy .
The minutes dampened hopes that after a period of rapid, sharp increases this year, the bank could potentially start cutting them in 2023 once inflation eases.
Bets on a more dovish approach in the new year were buoyed by data showing inflation fell faster than expected in July. That helped stocks recover from their June lows and weighed on the dollar.
However, a realization that policy was likely to remain hawkish undermined optimism, pushing all three Wall Street indices lower for the first time in four days on Wednesday, with the tech-heavy Nasdaq being the hardest hit.
And news that UK inflation has risen above 10 percent for the first time since 1982 added to the pessimistic sentiment.
In Asia, traders grew concerned that the Fed might fail in its bid to lower inflation without triggering another recession in the world’s largest economy.
Tokyo, Hong Kong, Sydney, Shanghai, Seoul, Taipei, Wellington and Manila were all down well.
“While the … minutes continue to emphasize the need to contain inflation, there are also concerns that the Fed may tighten more than necessary,” said Christopher Low of FHN Financial.
“There are signs of improvement on the supply side of the economy, there is some hope for some product prices to weaken, but there are still major concerns about inflation and inflation expectations.”
JP Morgan Asset Management’s Meera Pandit told Bloomberg Television: “We still anticipate that there will be a lot of interest rate volatility in the second half of the year, particularly when markets may be starting to acknowledge the fact that we may not necessarily see cuts will be in 2023, which are priced in.”
Sentiment was also weighed down by ongoing worries about China’s economy, with Goldman Sachs and Nomura again downgrading their growth outlook following another weak round of data and the country being hit by Covid-19 lockdowns.
The announcements came after Beijing surprisingly cut interest rates on Monday, before Premier Li Keqiang urged six key provinces – which account for about 40 percent of the economy – to strengthen pro-growth policies.
But Nomura economists said that while officials are likely to unveil more measures, “there is little likelihood of introducing a comprehensive stimulus package in a year of government reshuffle, while the need to maintain zero-Covid makes traditional stimulus measures much less effective.”
– Key figures at 0250 GMT –
Tokyo – Nikkei 225: down 0.8 percent at 28,984.56 (breakout)
Hong Kong – Hang Seng Index: down 0.6 percent at 19,805.16
Shanghai — Composite: down 0.6 percent at 3,272.85
Euro/dollar: rise to $1.0182 from $1.0178 on Wednesday
Pound/dollar: DOWN at $1.2046 from $1.2050
Euro/pound: up to 84.52p from 84.44p
Dollar/Yen: DOWN at 134.86 yen from 135.08 yen
West Texas Intermediate: FALSE, up 0.2 percent at $87.96 a barrel
North Sea Brent Crude: FALSE, up 0.1 percent at $93.57 a barrel
New York – Dow: down 0.5 percent at 33,980.32 (close)
London – FTSE 100: down 0.3 percent at 7,515.75 (close)
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