Powell’s Hawkish Pivot to Roil Asian Market Open

(Bloomberg) — Losses are expected for Asian stock markets on Monday as investors absorb Federal Reserve Chairman Jerome Powell’s dovish message that interest rates are being raised for longer in an arduous battle against inflation.

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Futures fell nearly 2 percent for Japan and 1.5 percent for Australia after a 3.4 percent plunge in the S&P 500. The slide was sparked by Powell’s denial that the trajectory of monetary tightening could soon to moderate.

Friday’s slide in the U.S. further shrunk a global recovery in stocks from volatile market lows in June, which was based in part on bets the Fed will turn to rate cuts next year as growth slows. Powell spelled out the need for continued tightening, comments that pushed the two-year U.S. Treasury yield toward 2022 highs and prompted investors to chase the greenback as a safe haven from volatility.

Dollar strength could be a drag on Asian markets on Monday. Investor anxiety was evident over the weekend as Bitcoin flirted with a sustained break below $20,000, a sign of continued risk appetite.

Powell was “really aggressive” in Jackson Hole, said Manish Bhargava, fund manager at Straits Investment Holdings in Singapore. There will be “a lot of red on Monday” in a summer rally as money exits emerging markets, he said.

Powell’s comments are a further boost to the dollar, analysts at Westpac Banking Corp said. and the Bank of Singapore. The latter’s chief economist Mansoor Mohi-uddin said it was both a safe haven and a higher yielder than lower-performing Group of 10 currencies such as the euro, pound and yen.

“USD/JPY is the most obvious way to play for an increasingly dovish Fed, with 140 likely to retreat ahead of the September FOMC meeting,” said Sean Callow, senior currency analyst at Westpac.

The dollar is up more than 10% this year, while the yen’s 16% slide leaves it at the bottom of the G-10, a split that reflects the Bank of Japan’s continued easy-money stance confirmed by governor Haruhiko Kuroda in Jackson Hole.

Borrowing Cost

But the dominant message from the symposium was that borrowing costs are rising from the US to Europe and Asia. Officials are battling one of the highest inflation in a generation, fueled by damage to supply chains for energy and parts due to Russia’s war in Ukraine and Covid restrictions in China.

“Restoring price stability will likely require maintaining restrictive policy for some time,” Powell told the audience at the Fed’s annual retreat. “The historical record strongly warns against premature easing of policy.”

Investors now see the Fed’s policy rate peaking in March at around 3.80%, and bets are on a cut in 2023. The US yield curve between five and 30-year maturities inverted for the second time this month, while the gap between the two highest -year yield and 10-year yield widened.

The reversals suggest the bond market expects a recession to be the sacrifice necessary to bring price pressures back under control.

Catalyst Hong Kong

Jackson Hole overshadowed other developments, including a tentative agreement between Beijing and Washington to allow US officials to review audit documents of Chinese companies trading in the US. This is a first step toward preventing the delisting of about 200 Chinese companies from US exchanges.

Hong Kong stock futures were flat and an index of U.S.-listed Chinese stocks pared the worst of a broader Wall Street selloff on Friday.

“The write-off risk is coming down and I think that’s a catalyst to support the Hong Kong market,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong.

The bigger picture, however, is the Fed’s goal to bolster financial conditions in the world’s largest economy until inflation is beaten. Incoming data on employment and consumer prices will be crucial to measuring progress.

“The game of assessing the Fed’s outlook has shifted from guessing how high the peak rate might be to understanding how long it might stay there,” said Yanxi Tan, FX strategist at Malayan Banking Bhd. in Singapore.

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