Asia stocks tumble on heightened US rate hike fears

SINGAPORE - Asian shares fell sharply on Wednesday, while the US dollar advanced after hawkish comments from Federal Reserve chairman Jerome Powell raised the possibility of the United States central bank returning to large rate hikes to tackle sticky inflation.

The Fed will likely need to raise interest rates more than expected in response to recent strong data, Mr Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress.

The hawkish comments from Mr Powell sent US stocks sharply lower, with the risk-off mood continuing in Asian trade.

MSCI’s broadest index of Asia-Pacific shares outside Japan was 1.45 per cent lower, while Australia’s S&P/ASX 200 index fell 0.93 per cent and South Korea’s Kospi lost 1.3 per cent. Japan’s Nikkei rose 0.1 per cent.

China shares fell 0.4 per cent, while Hong Kong’s Hang Seng Index slid 2.3 per cent.

Singapore’s Straits Times Index was down 0.7 per cent at 10.59am local time.

After a series of jumbo hikes in 2022, the Fed raised rates by 25 basis points in its last two meetings, but resilient economic data since the start of 2023 had stoked fears the US central bank might return to larger rate rises.

Those fears were realised when Mr Powell said: “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Markets are now pricing in an almost 70 per cent chance of a 50 basis point rate hike at the Fed’s March 21 – 22 policy meeting, according to CME’s FedWatch tool, up from about a 30 per cent a day ago.

“Powell has essentially opened the door to 50 basis point hike,” said Pepperstone head of research Chris Weston.

“He has given the Fed optionality, but one suspects he would be loath to do so as it is not a good look to change tactics when you’ve only just moved down to 25 basis points increments.”

Shorter-term Treasury yields continued its ascent on Wednesday, with the two-year US Treasury yield, which typically moves in step with interest rate expectations, up 2.7 basis points at 5.038 per cent, its highest since mid-2007.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at minus 106 basis points, its deepest since August 1981, according to Refinitiv data. Such an inversion is seen as a reliable recession indicator.

The spotlight will now be on Friday’s US payrolls data and next week’s inflation figures that will dictate further moves from the Fed.

In the currency market, the US dollar was at three month high, with the euro up 0.01 per cent to US$1.0548.

The Japanese yen weakened 0.15 per cent to 137.33 per dollar, while the pound was last trading at US$1.1834, up 0.06 per cent.

US crude fell 0.04 per cent to US$77.55 per barrel and Brent was at US$83.34, up 0.06 per cent on the day. REUTERS