Surprisingly hawkish signals that United States interest rates will rise in December electrified markets yesterday and left many Asian bourses in the red, the greenback up and gold prices slumping.
The ignition switch for such frenzied activity was innocuous: The US Federal Open Market Committee's notes after its regular meeting left out its usual reference to global risks restraining US growth and depressing inflation. That suggested that a long-running constraint on a rate rise had been removed.
Markets were also surprised by specific reference to "whether it will be appropriate to raise the target range at (the FOMC's) next meeting" on Dec 15-16, putting December firmly as a possibility for the first rate hike in nearly a decade.
"The suggestion is that the default position is shifting from inaction to action, and there will be an active discussion on whether to tighten in December," Bank of Singapore chief economist Richard Jerram said.
"If it is going to raise interest rates in December, then it needs to guide the markets in order to avoid any dislocation that could come from a surprise shift in policy."
Investors are now waiting for third-quarter US gross domestic product (GDP) and non-farm payrolls numbers on Nov 6 for signs on whether there is a case for a rate rise in December.
The change of tone hit regional shares. The Straits Times Index in Singapore slipped 1.3 per cent, Kuala Lumpur shed 1.2 per cent, Hong Kong dipped 0.6 per cent and Jakarta sank nearly 3 per cent. Taipei, Bangkok and Seoul were also down.
Meanwhile, stimulus hopes helped Japan close up 0.2 per cent ahead of its central bank's policy meeting today. Shanghai and Shenzhen also rose as investors await announcements on China's next five-year plan.
Gold prices felt the pain, tumbling to a two-week low of US$1,160.02 an ounce from US$1,172.18 on Wednesday, while the greenback strengthened against most Asian currencies, including the Singdollar, the ringgit, the Indonesian rupiah and the Thai baht. The Singdollar weakened from 1.3958 to the US dollar on Wednesday to 1.4025.
Capital Economics chief global economist Julian Jessop said the prospect of higher rates next year "should not be as alarming as it sounds" because it depends on global economic and market conditions improving and because many other central banks, including the European Central bank, Bank of Japan and People's Bank of China, are expected to ease further.
"We only expect the Fed funds rate to be increased to no more than 2 per cent next year, which would still be very low," he added. "We are also relatively relaxed about the impact of Fed tightening on emerging market equities and commodity prices. Both might actually benefit from the ending of uncertainty."
Citi Research analyst William Lee said: "For now, we maintain our view that March will be the most likely meeting for initiating interest rate normalisation, until we see more evidence that the FOMC would act sooner based on their established criteria - not rhetoric or saving face."
